The markets discount the future economy, but the markets are only as efficient as the future economy is clear. It seems that, drop by drop, as clarity comes gradually into focus, the markets are factoring in a recession.
I wonder, though, if the current market is in general distinguishing between economic turbulences of different types.
One type is fundamental and self reinforcing, driven by demand deterioration. The other type is a function of supply blockage – which I believe is currently the case – as travel, commerce, and other consumption patterns are artificially maneuvered in response to a temporary and isolated condition.
For the future economy, which the markets discount, the question is one of length and breadth of the supply blockage. Conceivably, the longer and the broader, the more it becomes likely that it spills into demand, as incomes and financial asset values fall.
On the other hand, if the condition is short-lived and in the aggregate marked by proportionately small numbers, demand may be sufficiently pent-up to drive a (substantial) rebound when the blockages are lifted.
That ultimately is the investment thesis at this time, or, on the contrary, the rationale for exiting.
It isn’t possible to know, but a case can be argued that the greater the near-term blockage the better the odds that the condition is short-lived and the economy we’ll find ourselves in on the other side will be expansionary, perhaps significantly so.
The market doesn’t seem to think so, at this time.