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'55% Chance Of Recession Within 12 Months': A Negative Market Outlook Despite Rally

Renato Capelj

The markets were optimistic Thursday: the S&P 500 index rallied, dusting off recent negative sentiment.

Yet once the optimism settles, further drawdowns are expected.

Corporate earnings, a driver of the stock market, rose in the second quarter but are expected to drop in the third quarter, trimming “full-year estimates to a mere 3.09%," according to Bloomberg.

U.S. equity futures dropped as the yuan weakened, and treasuries and gold have steadied, with gold now above $1,500.

The yield on three-month Treasuries traded higher than the 10-year, with the spread hitting its highest since 2007 on Wednesday.

"Our [three month to 10-year] recession probability model estimates a 55% chance of a recession within 12 months, which is the highest level since 2007," Priya Misra of TD Securities told The Wall Street Journal.

In response to China’s decision to stop purchases of U.S. farm goods, White House officials delayed their decision on the resumption of U.S. business dealings with Huawei.

Going forward, market participants should tread cautiously as long-term sentiment seems less than optimistic, and Fed officials have signaled further rate cuts may be warranted.

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