We discussed earlier last month how investors should not confuse the market and the economy.  The market might be volatile and suffering losses at the moment, but the US economy is still ambling along.  Manufacturing is likely in a recession, but the service sector is holding up for now, and our base case remains that there is a low risk of a US recession over the next 3 months (although that risk has been rising).

However, there are linkages between the market and the economy: these are reflexive and the lags can vary.  One clear example of the market affecting the real economy can be seen in the following chart.  High-yield spreads give a good 3-month lead on initial unemployment claims.  Claims had been rising, but lately have come off a little.  Nonetheless, we anticipate the long-run relationship in the chart below will begin to reassert itself soon, and claims should begin rising again. This would feed into a deteriorating outlook for the US economy.

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Source: Bloomberg and Variant Perception

S&P momentum (bottom chart, 12-month momentum) has already turned decisively negative.  If recession risk materially rose, this would reinforce negative momentum and result in steeper price declines.

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Source: Bloomberg and Variant Perception