Prepare For The Worst: Wells Fargo's Warning For The U.S. Economy Should Be Listened To

By Eliana Regev | Sunday, 22 May 2022 05:15
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Wells Fargo Investment Institute said it lowered its economic expectations with a small U.S. recession now on the apparent future in its base case scenario for the end of 2022 and early 2023, making it one of the more bearish big U.S. banks.

By comparison, Goldman Sachs recently tabulated the odds of a recession at 15% for the next year and 35% for the next two years.

Morgan Stanley’s latest research shows a 25% chance for a recession starting in the next 12 months.

Bank of America Corp. most recently said it sees recession risks as “low for now but elevated for 2023.”

Wells Fargo’s research arm also cut its year-end 2022 Gross Domestic Product (GDP) growth target to 1.5% from 2.2% and cut its year-end 2023 target to a decline of 0.5% from its previous expectation for GDP growth of 0.4%.

It predicts a peak-to-trough contraction of 1.3% for three quarters. This would tie with the pandemic-induced 10% contraction in 2020, the 3.8% fall in the 2008-2009 financial crisis and the 0.1% dip in 2001 and the 1.4% drop in 1990/1991.

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While a first-quarter 2022 economic contraction was due primarily to solid imports and inventory changes, Wells Fargo noted that “consumer activity has weakened since then.”

It mentioned the development of all three major risks identified in its December 2021 outlook, including new COVID-19 outbreaks and restrictions, higher-for-longer inflation, and a much stronger dollar. These issues were due to the Russia-Ukraine war and aggressive Federal Reserve policy.

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“These shocks are taking an economic toll,” it said.

For its more bearish call, it cited a loss of momentum in sentiment among manufacturers and service providers, the University of Michigan’s March consumer sentiment reading - its lowest since 2011 - as well as broad-based declines in consumer activity and a series of “sharply weak high-frequency economic data from mid-April to mid-May.

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The firm also cut its S&P 500 target for year-end 2022 to a range of 4,200-4,400 from a range of 4,500-4,700 but kept its 2022 EPS estimate at $220 for S&P 500 companies.

On Wednesday afternoon, the S&P 500 was trading down 3.1% at 3,961.8. The firm also raised its forecast for U.S. unemployment in 2022 to 3.8% from its previous forecast of 3.4% and boosted its 2023 unemployment forecast to 4.4% from its earlier projection of 4%. But it kept its 2022 year-end Consumer Price Index (CPI) inflation estimate at 7.7%.

In the same research note, Wells upgraded its utility sector rating to “neutral" from “most unfavorable” and downgraded consumer discretionary to “unfavorable" from “neutral" to rebalance between cyclical and defensive sectors.

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