U.S. equities extended their last week’s sell-off on Monday, while 10-year Treasury yields dropped to 3.8% amid a resurgence in recession fears as financial markets were unsettled by additional signs of labor market weakness.
According to Alpine Macro strategists, further sell-offs can be anticipated as the overall market remains highly overbought following the recent price surge. But despite these concerns, strategists maintain a bullish outlook on equities.
"We have been in the ‘no recession’ camp for some time and believe the Federal Reserve will very likely reverse its tight monetary policy before interest rates start to choke off economic growth and send the U.S. stock market into another major bear market."
Alpine Macro’s optimism is grounded in a few critical arguments. First, they highlight the unique nature of the COVID-19 recession, which differed significantly from past economic downturns. The recession was driven by government lockdowns rather than the natural progression of a boom-bust cycle.
This distinction means that the sharp spike in inflation was primarily caused by supply-side disruptions rather than excessive demand. As a result, inflation has been falling as supply chains recover, independent of the Federal Reserve’s monetary tightening.
"Inflation was already on its way down before the Fed even started to raise rates," the strategists note.
Alpine also notes that the bears often cite the "burnt-out" savings from pandemic-era income transfers as a reason for imminent recession, suggesting that consumer spending will collapse as these savings deplete. However, strategists dismiss this view, explaining that the personal savings rate has normalized and consumer spending remains robust.
"Consumers as a whole have never drawn on their savings to support their spending," they assert, pointing out that household net worth has increased significantly, providing a buffer against economic shocks.
Concerns about rising credit card delinquency rates and consumer stress were also addressed. While there has been an increase in credit card delinquencies, this represents a small fraction of total consumer debt. Overall, U.S. households have reduced their indebtedness since the 2008 financial crisis, and the debt service ratio remains low.
"To say that U.S. consumers as a whole are seriously stressed is factually incorrect,” Alpine argued.
Moreover, the labor market, despite showing some signs of cooling, is not in distress. The firm says that the rise in the unemployment rate has been primarily driven by an increase in labor supply rather than a decrease in labor demand. They also argue that the so-called Sahm Rule, which predicts recessions based on rising unemployment rates, may not apply in the current cycle.
Financial stress indicators have been easing, reducing the likelihood of a financial crisis precipitating an economic recession. The strategists argue that the current monetary policy, while tighter than before, is not unduly restrictive given the higher levels of nominal growth and inflation.
Looking ahead, Alpine Macro sees potential for a strong bull market in equities, driven by continued innovations and productivity gains, particularly in the AI sector.
They draw parallels to the late 1990s internet boom, suggesting that the current AI boom could lead to significant market gains.
"The vast number of stocks have barely risen over the past two and a half years... With Fed easing in sight and bond yields plunging, these sectors and stocks should have more gains to come."
“Small caps, financials and eventually industrials will do well in 2025, while the Mag 7 could be inflated even more and move into bubble territory,” they added.
“In the 1990s, stock market corrections and shakeouts were steep and vicious, but the subsequent rise in prices was equally furious.”
Strategists said they expect a similar pattern to be repeated in the current cycle.