Forecaster François Trahan continues to anticipate a recession in the United States and a significant stock market decline. He even speaks of a time bomb in the market.
“Corporate profits will be down this year and significantly in the second half of the year,” he said during a virtual conference organized Tuesday evening by portfolio managers affiliated with Desjardins Wealth Management.
François Trahan explains that growth stocks (like Amazon, Meta and Nvidia) generate strong demand at the start of an economic slowdown because investors will fear cyclical stocks. “They are therefore turning to companies with more structural growth. These stocks hold up until the day they no longer manage to keep up with market expectations, and then they break,” he explains.
“We may have a time bomb in the markets before we really see a reaction in the market and the S&P 500 index.”
Profit decline
According to François Trahan, it is normal for investors to think that a soft landing of the economy is a plausible scenario with the probable end of rate hikes by the central bank. “We saw this phenomenon in 2000 and in 2007-2008, but the Fed [Réserve fédérale américaine] does not want to admit that it raised rates more than it should have and that the end result is a recession. We must now expect a drop in corporate profits,” said François Trahan on Tuesday.
SCREENSHOT
François Trahan in conversation with portfolio manager Daniel Ouellet during the event broadcast Tuesday evening
He points out that it takes almost two years before an increase in interest rates has an impact on the economy. Since the first rate hike took place in March 2022, he points out that if the relationship were perfect, the second quarter this year would be the start of the real economic downturn.
François Trahan says he expects several negative months for the job market in the United States. “This is the key variable, because 68% of GDP [produit intérieur brut] American is linked to consumption, and employment is a critical variable. »
Those who believe in a soft landing believe that there will be no increase in the unemployment rate, but most of the leading employment indices have already turned and signal that unemployment will rise shortly. This is usually the variable that pushes the Fed to cut rates and shifts expectations of a soft landing to fears of recession.
François Trahan, forecaster
He therefore recommends that investors take refuge in sectors considered more defensive, such as the health sector (pharmaceutical stocks) and that of public services, where we find companies with “more stable” income. “The vulnerability of growth stocks comes from their high valuation multiples,” he says.
François Trahan participated in a conference broadcast on Tuesday aimed at taking stock of economic, financial and political news. This event was organized for clients of the Ouellet Bolduc Group, a wealth management team overseeing approximately $1.7 billion in assets under management.
No hindsight
François Trahan had indicated to The Press last September that he expected the stock market to fall by 35% over an 18-month period. Believing that there is no chance that the American economy will avoid falling into recession, he said he believed that the S&P 500 index risked falling to around 2,800 points.
The S&P 500 index was at 4,275 points when François Trahan made these remarks, at the end of September. The S&P 500 index ended Tuesday’s session at 4,919 points, that is to say at a level 15% higher than what it was at the end of September.
Inducted into the Hall of Fame of Institutional Investors as a strategist in 2016, François Trahan notably predicted the end of the speculative real estate bubble in 2007. He now runs his own firm, Trahan Macro Research.
François Trahan caused a stir two years ago when he said on the set of a public affairs program on TVA that he anticipated an “apocalyptic” situation for the years 2023 and 2024.
In his opinion, an “economic apocalypse” results in a rising unemployment rate and probably a financial crisis.
Who is François Trahan?
Now a resident of Richmond, Virginia, François Trahan has over 25 years of experience in finance and was inducted into the Institutional Investors Hall of Fame as a strategist in 2016.
At the head of his own company – Trahan Macro Research – he advises a clientele mainly made up of institutional investors.
An economics graduate from the University of Montreal, his approach is based on an understanding of the macroeconomic forces of economic cycles and how interest rates and the monetary policy of the US Federal Reserve help shape trends.
During his career, he worked for several major investment banks. After starting at BCA Research in Montreal, he subsequently worked at Bear Stearns, where he announced, in 2007, the end of the speculative bubble in real estate.