One of our accounts recently asked us to assess the extent to which the stock market has discounted a garden-variety recession. That’s an interesting question. We have been thinking and writing about this question all year.

This is an excerpt from our Oct 31 Morning Briefing.

Our current assessment is that the market has discounted a rolling recession, a.k.a. a “soft landing,” “growth recession,” or “mid-cycle slowdown.” We give this soft-landing scenario a 60% subjective probability; the remaining 40% we assign to the hard-landing one. We think investors have discounted the former but remain nervous about the latter.

The stock market has been working on forming a bottom since September, finding support around the June 16 low of 3666, as we noted above. That bottom should hold if real GDP growth, on a y/y basis, hovers between 0.5% and 1.5% through the first half of next year and then recovers to more normal growth during the second half of next year, as discussed below. In addition, it should hold if the Fed delivers two more hikes in the federal funds rate by the end of this year (as is widely expected) and then pauses rate-hiking during the first few months of next year. Furthermore, the bottom should hold if inflation shows clear signs of moderating in coming months, as we continue to expect.

Let’s examine the extent to which the stock market is discounting a soft landing or a hard landing. Since we think that it has mostly discounted the former, we reckon that the latter could send the S&P 500 down by another 10%-15% from its most recent bottom on October 14. Consider the following:

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