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U.S. stock futures rose Friday morning as equities at least temporarily paused a downward slide, as concerns over the prospects of a recession remained elevated.
Contracts on the S&P 500 rose by about 1% before the opening bell after the index slid to its lowest level since Dec. 2020 a day earlier. The S&P 500 headed for a weekly loss of 6% — its worst since March 2020.
Dow futures gained more than 200 points, or about 0.8%, in early trading. And futures on the Nasdaq rose more than 1% as the 10-year Treasury yield pulled back to about 3.2%.
Even given Friday’s early gains, the major averages remained on track to post steep weekly losses as traders considered the likelihood and timing of a potential recession. While signals of an economic slowdown have been brewing for months now, heightened fears of a more significant downturn resurged in just the past week alone. That came especially after last Friday’s Consumer Price Index showed inflation remained at multi-decade highs even following the Federal Reserve’s initial moves earlier this year to raise interest rates and bring down demand and prices.
And with the Fed now turning even more aggressive — starting with its first 75 basis point interest rate hike since 1994 on Wednesday — the potential for a slide in economic activity as the central bank trades some growth for lower inflation appears increasingly likely.
“The market is reevaluating what the odds of a recession are in the near-term and what the actual downside on earnings and what the recession will really look like,” Ross Mayfield, Baird investment strategy analyst, told Yahoo Finance Live on Friday. “But to me, it’s a fairly kind of tidy story about higher interest rates, more aggressive Fed, and multiple times in the past that leads to some sort of financial crisis or recession. I think the market’s trying to price the odds of that.”
And that pricing recalibration has so far brought the S&P 500 24% below its Jan. 3 record closing high. But stocks likely still have further to fall if history is any indication, some strategists said.
Deutsche Bank, one of the first major banks to call for a 2023 recession earlier this year, pointed out that the S&P 500’s current decline from its peak is so far in-line with the median drop seen amid recessions post-World War II. Currently, it’s the fourth worst non-recession correction over that period, Deutsche Bank’s Jim Reid said in a note Friday morning. But when recessions materialize, bear markets for stocks tend to deepen.
“The timing of the recession is a hot topic at the moment. When it hits, both [Binky Chadha, Deutsche Bank chief U.S. equity and global strategist] and I would expect the S&P 500 to be down -35 to -40% from the highs,” Reid said. “The rationale from [Chadha] being that the initial overvaluation was more extreme than normal cycles, with my additional comment being that this recession marks a regime shift from decades of declining inflation to higher structural levels. This deserves a bigger de-rating than average.”
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