The US Federal Reserve estimates the probability of a recession in the USA in the next twelve months at 61.5%. Looking at the past recessions in 1990 and 2007, the downturn predicted by the model always occurred exactly or even a few months earlier. There are also other indicators that strongly point to a difficult economic situation, such as the unemployment rate and the money market interest rate. Before every recession in the past 70 years, the unemployment rate stagnated at a low level compared to previous years, only to skyrocket right at the start. At the same time, money market interest rates rose sharply, as we are currently seeing in the USA.

You might think that the recession in the US is long overdue. The fact that it is currently being delayed is due to the government under US President Joe Biden, which has pumped a lot of money into supporting the domestic economy and built up an ever-increasing national deficit in the process. As long as this continues, it may be possible to delay a recession. In the long term, however, it is likely that the USA will not be able to maintain this support, which could then hit the economy. We can therefore conclude that the probability of a recession in the US economy is high and there is no prospect of a rescue by the Federal Reserve, as it generally only starts to cut interest rates when a recession begins, not before. Should a recession occur, this could in turn have an impact on the capital markets.

As interest rates tend to fall, price gains can be expected for ten-year US government bonds. US equities are likely to perform less favorably. After the start of a recession, share prices have generally fallen, although interest rate cuts also began at the start of the recession. The average price loss up to the low point after the start of the recession was 18%. Only when the interest rate cuts were already at an advanced stage did share prices begin to recover from their respective lows by an average of 19%. Precisely because the stock market is very highly valued, the losses this time are likely to be comparatively high, as figures from past recessions suggest. Investors should therefore exercise caution.

The German and European stock markets promise brighter prospects, as they are currently valued much more favorably. Investors are overlooking the fact that the current uninspiring state of the German economy is having little impact on major German companies, which generate more than 80 percent of their sales outside the country's borders. This could once again confirm the old rule that the less popular investments will perform better both in the next recession and in the next ten years than technology companies, which are currently much more popular with investors.

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Capital market outlook