Stocktake: US recession outlook is key for stocks

US recession fears are rising. That’s important, say strategists, because whether or not the US economy falls into recession will determine the severity and duration of the current bear market.

Strategists point to two types of bear – recessionary and non-recessionary bear markets. LPL Research's Ryan Detrick says there have been eight non-recessionary bear (or near bear) markets since 1945. On average, stocks fell 24 per cent; downturns lasted seven months.

However, a recessionary bear market is a different beast. On average, stocks fell 35 per cent and declines lasted 15 months.

Currently, most strategists agree with US treasury secretary and former Federal Reserve chairwoman Janet Yellen's contention that the US will avoid recession. Even Morgan Stanley, one of Wall Street's more bearish voices this year, estimates a 27 per cent chance of recession in the next year.

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However, history suggests otherwise, says market strategist David Rosenberg, who warns tightening cycles are usually followed by recessionary bear markets.

Similarly, Ritholtz Wealth Management's Ben Carlson cautions that since the 1940s, every time inflation exceeded 5 per cent, a recession soon followed.

Investors will be hoping the Fed can engineer a soft landing whilst hiking rates, but its task is not an easy one.