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No, the Stock Market Hasn't Discounted a 2022 Recession: LPL Strategist

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The stock market hasn’t yet factored in a potential recession for this year, according to Quincy Krosby, chief equity strategist for LPL Financial. While volatility is elevated, it hasn’t reached the heights associated with panic selling, she said.

ThinkAdvisor recently asked Krosby, via email, five questions related to market volatility. Here are her responses.

1. What’s your view on where volatility is headed in Q3 & Q4? 

Volatility, as measured by the VIX (volatility index), has been in a fairly tight, but elevated range in the mid-high 20s. Still, we haven’t experienced the higher panic levels associated with major sell-offs, when the VIX climbed to 40 and above. Exogenous, unexpected shocks are typically responsible for the VIX to climb higher as traders worry about future shocks and pay higher prices for downside protection on the S&P 500. 

During this period, market participants understand what the Federal Reserve is trying to accomplish to curtail inflation. Any shocks that would send the VIX dramatically higher would probably come from the unintended consequences of financial conditions tightening too much as the Fed continues to raise interest rates. 

2. What are the greatest risks and opportunities for investors in this environment?

The greatest risks for investors in this environment are to think that the Fed will never be able to rein in inflation, and that supply chains will never unwind.

At some point, we will witness the plateauing of inflation, as well as prices easing as global supply chains untangle. When professional portfolio managers begin to see the backdrop improve, even at the margin — or get less bad — they typically begin to build their positions in attractively valued stocks.

3. What chance of a recession do you think there is today, and to what extent has the (equity) market already discounted a recession? 

The market has not yet discounted a recession, certainly not for 2022. With the labor market still strong, there is an ongoing debate about whether we are experiencing a slower growth environment instead of moving towards a recession. Much will depend on how much more aggressive the Fed will need to be to bring inflation to levels commensurate with price stability.

4. Do you think the markets are oversold, and where do you see the major indexes ending 2022?

Markets have been wavering between overbought and oversold conditions, with each scenario leading to bouts of selling or increased buying. This should be expected amid a backdrop of uncertainty with regard to inflation, supply chain constraints, the path of interest rate hikes and the effects on corporate earnings.

5. What should advisors be telling clients at midyear?

At midyear, advisors should help clients understand that we’ve been through difficult cycles before and the market invariably heals and climbs higher. During this particular downturn, the market is adjusting to higher interest rates and finding an equilibrium in terms of valuation. It is a process, but one that leads to an attractively valued market that has discounted interest rates, corporate profits and the economic backdrop.