Slumping U.S. profits now makes a recession appear inevitable, according to Societe Generale analyst Albert Edwards. Edwards argues the steep decline in U.S. whole-economy profits that has been recorded in recent quarters is almost always a sign of a recession on the horizon.
Edwards believes this recession could be particularly bad because of the way the Federal Reserve has handled interest rates in recent years. He contends interest rates have pumped up the S&P 500, and U.S. stock prices are now the driving force behind monetary policy.
“As more and more excuses are wheeled out to justify its inaction, we all surely know by now that the Fed’s articulated ‘data-dependent’ rate hikes are primarily focused solely on the level of the S&P, i.e., when is slumps they will quickly back off rate hikes and use any excuse necessary – including dismissing surging core CPI inflation,” Edwards explained.
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Edwards believes the S&P 500 is majorly overvalued at this point, but he emphasized that corporate bonds are even more at risk ahead of a possible recession. He further ascertains the coming recession will likely generate a wave of U.S. corporate defaults.
If his wave of defaults thesis plays out, investors should consider selling the SPDR Barclays Capital High Yield Bnd ETF (NYSE: JNK) before the recession hits.
Disclosure: The author holds no position in the stocks mentioned.
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