Even people who don’t follow the stock market closely are aware that the global economy is weakening and appears to be heading into recession.
For those who track the stock market, the signs are ominous: the U.S. was the last major market to notch gains this year and in October the U.S. market followed the rest of the global markets into an extended slide which has yet to end.
Just as sobering, key sectors such as oil, banking and utilities have crashed with alarming ferocity, reaching oversold levels last seen in 2008 as the global financial system was melting down.
These sectors crashing sends an unmistakable signal: the global economy is heading into a potentially severe recession and assets will not be rising in value in a recessionary environment. So better to sell risk-assets like stocks now rather than later, and rotate the money into safe assets such as Treasury bonds.
And indeed, households now own more Treasuries than the Federal Reserve–a remarkable shift in risk appetite.
Many other indicators of recession are in the news: auto and home sales and global trade are all slumping.
Are we in a repeat of the global financial meltdown and recession of 2008-09? The sharp drop in equities is certainly reminiscent of 2008. Indeed, the December decline is the worst in a decade. Or are we entering a different kind of recession, the equivalent of uncharted waters?
And if we are entering a recession, what can central banks and governments do to ease the financial pain and damage? We can’t be sure of much, but we can be relatively confident central banks and states will respond to the cries to “do something.” This poses two questions: what actions can central banks/states take, and will those policies work or will they backfire and make the recession worse?
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