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Wall Street is obsessing over the chances of a nasty U.S. recession within the next year

Brian Sozzi
Editor-at-Large

Wall Street is still very much obsessed with trying to call the next U.S. recession, despite several respectable trading sessions since Christmas. Hey, what Wall Street pro decked out in full Armani doesn't want to be known as the “hero” on the trading desk who predicted the next recession and has a handful of winning trades as a result?

Apple’s brutal $7 billion revenue miss for the holiday quarter — which has the Street tripping over themselves to slash profit estimates on the tech giant for the next 12 months (yet the Buy ratings remain intact) — did nothing to ease concerns of a sharp growth slowdown in the U.S. this year and into early 2020.

“We wouldn’t rule out a shallow recession,” says Capital Economics Chief Economist John Higgins.

Fueling Higgins’s cautiousness is slowing sales for companies overseas (see Apple’s call out of weakness in China), higher labor costs and a prolonged U.S. trade tift with China. All told, Higgins thinks these factors could seriously stunt growth in the U.S. and send stocks spiraling into a bear market. Just one brief recession in the last half century, 1980, has come and gone without a bear market, writes Higgins. The worst period for the market was the 57.7% plunge in the S&P 500 from October 2007 to March 2009 amid the Great Recession.

Economists are making their predictions for the next recession. (AP Photo/Richard Drew, file)

Higgins isn’t alone in clinging to the notion of a looming U.S. recession.

The calls continue: JPMorgan economist Jesse Edgerton is perhaps ringing the alarm bell louder than Higgins. Edgerton’s analysis puts the chances of a U.S. recession beginning within 12 months at 39%. WhIle Edgerton acknowledges strength in the labor market and U.S. consumers, he throws more weight behind tightening financial conditions and slowing global growth impacting business confidence. That view has already played out with recent material warnings from the aforementioned Apple, FedEx, and Delta.

“While we still think the most likely scenario includes continued moderate growth in 2019, we acknowledge that risks of a downturn have increased,” contends Edgerton.

So much for the Dow Jones Industrial Average being up 8% since Christmas serving as a sign the U.S. will avoid a recession this year.

Not helping at all: Recession forecasters also continue to take their cues from elsewhere in the markets. First, profit estimates on the S&P 500 are dropping like flies that digest pesticide. S&P 500 profit estimates for the fourth quarter fell by 3.8% in the last three months of 2018, according to FactSet. The decline was larger than the five-year average of 3.1% during the fourth quarter. All 11 sectors were hit with a decline in their estimates by Wall Street analysts, led by materials (-9.5%), utilities (-8.9%) and energy (-7.9%).

Profit estimates for 2019 declined 2.3% in the fourth quarter, too.

Meanwhile, base metals such as copper and platinum — often viewed as proxies on the health of the global economy — remain well off their highs. Industrial metals have fallen 24% since their peak on April 18, 2018, according to JPMorgan, which adds that the drop in key metals alone is pricing in a 56% chance of a typical U.S. recession.

The bottom line: It’s as if Wall Street is trying to manufacture a U.S. recession with its words so it can buy shares of great companies on the cheap, no? Not everyone on Wall Street has performed up to all-star expectations amid the 10-year bull market. So, why not talk down the market and get some good entry points.

Keep in mind though we are fresh off a 312,000 increase in jobs in December and impressive upward revisions to October and November data. Hence, it remains difficult to understand Wall Street’s obsession with recession predicting.

Weird times that are only likely to get weirder as 2019 progresses.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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