3 Scenarios That Could Trigger a U.S. Recession: EIU
Risk 3: Asset Price Collapse
A combination of rising interest rates, high inflation, concerns about the economic fallout from the war in Ukraine and worsening business and consumer sentiment spook U.S. markets and cause asset prices to crash.
Possible triggers: The U.S. bear market deepens. U.S. stock market indexes fall by 40% or more from their recent peak by July as a result of one or more of these factors, without changes in monetary policy to compensate.
EIU expectations: U.S. stock prices will continue to cool in the second half as the Fed begins to withdraw its stimulus and the pace of economic growth starts to slow. However, the Fed will maintain a gradual approach to tightening, helping to prevent a severe collapse in asset prices.
Downside scenario: Although stock markets have officially entered bear market territory (down by at least 20% from a recent peak), asset prices remain well above their pre-pandemic levels. Both the S&P 500 and Nasdaq are up by 10% compared with February 2020.
The cyclically adjusted price-to-earnings ratio developed by Robert Shiller stood at 32 in early June, more than double its low point of 15 reached during the global financial crisis, which suggests that many assets are still overvalued.
This means that asset prices have more room to fall if the economic outlook turns south — for example, if the Fed were to embark on a much more aggressive path of tightening than the market currently expects, or if consumer demand were to contract because of another spike in inflation or another Covid variant.
A collapse in asset prices would exacerbate the drop in consumer spending, as downward movements in household wealth tend to depress more short-term household spending.
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