- US stocks face more downside than upside over the next two months as banks and property firms “still have bad recession vibes,” according to the note from Bank of America strategists citing EPFR Global data.
Traders surrender to recession paranoia in U.S. market rout
, Bloomberg News
When all three happen at once, the argument gets stronger that it’s time to take the threat seriously.
That’s the case now, when a concerted move in the direction of nervousness on the part of stocks, bonds and commodities is forcing traders into a real-time reassessment of their expectations for growth.
- Such concern may seem misplaced when the U.S. economy just generated 678,000 jobs in a single month, and few observers see a downturn in the immediate future.
- At the same time, markets are relentlessly forward-looking, and their common message is getting harder to overlook. The S&P 500 sank almost 3 per cent Monday and oil approached the highest price in a decade, while nickel and wheat were the latest materials to surge.
- Taken together, the message now suggests the threat of an economic retrenchment has increased amid war in Europe and a staunchly hawkish Federal Reserve.
- Ten-year inflation break-evens just increased to the highest level since 2005, while the yield curve -- the spread of 10- over two-year Treasury yields -- narrowed to levels not seen since the pandemic recession.
- History shows an outright inversion, as happened in 2019, would signal an imminent contraction.
- While the S&P 500 fared better thanks to its haven status and distance from Russia, with peak-to-trough losses limited at 12 per cent for now, an analysis by Deutsche Bank AG strategist Binky Chadha suggested American stocks are emitting their own troubling signals.
- Small-cap stocks reflect deeper troubles. The Russell 2000, which is already in a bear market, appeared to price in a manufacturing reading of 40, a level indicating a “severe recession,” he said.
- Over the past week, at least three Wall Street strategists lowered their 2022 year-end targets for the S&P 500, which closed Monday down more than 12 per cent from its all-time high. Market veteran Ed Yardeni, citing rising recession risk, slashed his target for the S&P 500 for a second time in as many months. At 4,000, his new projection implies a 17 per cent drop from the index’s peak in January.
“We can all hope for the best, but preparing for the worst (or worse than we’ve already seen) is the prudent risk strategy right now,” Peter Tchir, head of macro strategy at Academy Securities Inc., wrote in a note.
There’s a point in stock and bond markets when price action stops being a sign of trouble and starts to become a cause: people’s sense of wealth wanes, investment decisions are shelved. That’s the risk in commodities right now, where soaring prices threaten to crimp consumer sentiment.
- From wheat and corn, oil to copper, prices are soaring after Russia’s invasion in Ukraine sparked concern over a shortage of supply from two of the world’s largest producers.
- While the rallies may have begun months ago in the face of booming demand -- the opposite of a recession signal -- many traders see the latest leg as something that could by itself kick the world into a downturn.
>.The surge in energy prices is particularly ominous Not only does it strain household consumption, it adds to price pressures, potentially spurring central banks around the world to tighten monetary policy to battle inflation.
“The oil prices, as well as the yield curve and where we are in the cycle, are certainly raising recessionary signals,” Victoria Greene, founding partner and chief investment officer at G Squared Private Wealth, said by phone. “I’m not saying the sky is falling tomorrow. But I do think it’s certainly in the cards over the next 12 months.”
- But Neil Dutta, head of economics at Renaissance Macro Research, says concerns over an oil shock are overblown. Not only are Americans today in a better financial position to weather high energy bills, real interest rates remain deeply negative, leaving ample room for the central bank to hike rates without derailing the economy, he argues.
“I have some sympathy for the idea that the Fed’s response to higher energy prices exacerbates the downside shock, but we are far from this point,” Dutta wrote in a note. “Consumers continue to have a high level of excess saving that can act as a shock absorber to oil prices.”
To be sure, markets constantly over-react. Panic takes over investor psychology, and asset prices outrun anything that’s justified by fundamentals. Markets are under multiple threats, and there are arguments against projecting the message of any of them to the global economy. According to one, the pandemic itself is a brake on oil’s impact -- so many people are working at home that the tax imposed by surging fuel prices might be mitigated.
- To Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, the current volatility is being driven by geopolitical turmoil that might swiftly reverse should a cease fire take hold in Ukraine.
“How can we be going into a recession if we had such a strong non-farm payroll number?” Ren said by phone. “The current signal is kind of gloomy for the economy down the road, but it’s not driven by economic data. It’s driven by the geopolitical events, so I don’t know if it’s as valuable.”
Indeed, for now, economists expect solid growth in the U.S. economy every quarter during the next year. But forecasts such as those haven’t always been of much use in the past.
- A 2014 study by Prakash Loungani of the International Monetary Fund found that not one of 49 recessions suffered around the world in 2009 had been predicted by the consensus of economists a year earlier.
- Loungani previously reported that only two of the 60 recessions of the 1990s had been anticipated a year in advance.
While it’s not saying much, the market has shown a better record in predicting recessions, with signals strengthening as prices snowball. Among all the 20 per cent drops that have hit American stocks since the Great Depression, all but two preceded or coincided with U.S. recessions, according to data compiled by Bloomberg.
- Today’s environment, in some way, reminds Ryan Grabinski, a strategist at Strategas Securities, of what happened in the early 1990s, when Iraq’s invasion of Kuwait fueled a similar spike in oil. Back then, the S&P 500 fell into a bear market and the U.S. entered a recession.
“Perhaps the scary part is that in 1990, the Fed funds rate was 8 per cent and eventually embarked on an easing cycle,” Grabinski wrote in a note.
“Today, the Fed is at the beginning of a hiking cycle. It seems more and more likely a recession is unavoidable.”
Stocks sink as Nasdaq, S&P 500 snap lengthy win streaks
US Stocks Slide on Specter of Recession in Europe: Markets Wrap
Global Stocks on Course for Worst Week Since March: Markets Wrap
US Stocks Slide on Specter of Recession in Europe: Markets Wrap
US Stocks Slide as Investors Seek Safety in Bonds: Markets Wrap
US Stocks Slide on Specter of Recession in Europe: Markets Wrap
US Stocks Slide on Specter of Recession in Europe: Markets Wrap
(Bloomberg) -- US stocks notched the worst week since March as anxiety rose that central banks will have to ratchet interest rates higher to tamp down inflation. Bonds rallied on bets that excessive tightening will bring on sharp economic downturns.
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The S&P 500 Index ended the shortened holiday week 1.4% lower while the Nasdaq 100 benchmark fell 1.3% as investors took profits from the year’s winning technology names. Chipmakers Marvell Technology Inc. and GlobalFoundries Inc. were among Friday’s laggards while drops in Microsoft Corp. and Nvidia Corp. weighed on the gauges.
- The second-quarter stock rally — fueled by the frenzy for growth-oriented artificial intelligence stocks — is fraying under the threat of more rate hikes and fears that the full economic impact of aggressive central bank policy has yet to be felt.
Without the AI narrative, the stock market would have been “a lot rockier,” according to Linda Duessel, senior equity strategist at Federated Hermes.
“Underneath the surface, the average stock is only up a couple of percent year-to-date,” she told Bloomberg Television. “Portfolio managers have had a very difficult time beating the S&P this year.”
Federal Reserve Chair Jerome Powell dampened the mood this week when he said the US may need one or two more rate increases in 2023.
- Other Fed commentators pushed back against investor hopes for a rate cut this year
- “I’d be comfortable with the information I have today, staying right where we are and just staying here through the rest of this year and long into next year,” Atlanta Fed President Raphael Bostic said at an event Friday.
Economic data from Germany and France ignited fears of a downturn in Europe, spurring Treasuries to take part in a global bond market rally as investors sought safe havens.
Read more: Global Bonds Rally as Data Fans Fears of a European Recession
- Treasury Secretary Janet Yellen sought to temper concerns over a US recession, she acknowledged the risk and said a consumer-spending slowdown was needed.
- Meanwhile, the US manufacturing purchasing managers index fell to 46.3 in June from 48.4 the prior period, the lowest reading since December.
“There is consistency throughout the global economy in at least one regard — manufacturing remains in a recessionary mode,” Ian Lyngen at BMO Capital Markets said.
“Translating this to US monetary policy is much more challenging than it might be overseas,” he wrote in a note to clients. “We don’t think this data has immediate implications for the FOMC’s July decision — for that we’ll look to NFP and CPI. Nonetheless, it was a disappointing print.”
- US Treasuries yields fell Friday, some by as much as 10 basis points.
- The inverted spread between the two- and 10-year bond widened to more than 1% — such inversions are considered a recessionary signal.
Scott Ladner, chief investment officer at Horizon Investments, said the bond rally was riven by “growth fears with European flash PMIs coming in soft this morning,” adding that there’s a bit of “breath-taking after the last few weeks of very strong risk-asset performance.”
- Concern about the economic outlook was reflected in a rotation into bonds and out of stocks in weekly flow data. Investors yanked $5 billion from global equity funds in the week through Wednesday and added $5.4 billion to bonds.
- US stocks face more downside than upside over the next two months as banks and property firms “still have bad recession vibes,” according to the note from Bank of America strategists citing EPFR Global data.
The US dollar and gold futures climbed. Bitcoin headlined a rally in cryptocurrencies as it jumped to its highest level in a year.
Some of the main moves in markets:
Stocks
The S&P 500 fell 0.8% as of 4 p.m. New York time
The Nasdaq 100 fell 1%
The Dow Jones Industrial Average fell 0.6%
The MSCI World index fell 1%
Currencies
The Bloomberg Dollar Spot Index rose 0.4%
The euro fell 0.6% to $1.0891
The British pound fell 0.2% to $1.2719
The Japanese yen fell 0.5% to 143.80 per dollar
Cryptocurrencies
Bitcoin rose 2.5% to $30,904.63
Ether rose 0.8% to $1,902.27
Bonds
The yield on 10-year Treasuries declined five basis points to 3.74%
Germany’s 10-year yield declined 14 basis points to 2.35%
Britain’s 10-year yield declined five basis points to 4.32%
Commodities
West Texas Intermediate crude fell 0.3% to $69.30 a barrel
Gold futures rose 0.3% to $1,929.20 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Mark Tannenbaum, Michael Mackenzie, Denitsa Tsekova and Cecile Gutscher.
(A prior version corrected the index name for the Russell 2000.)
US Stocks Slide on Specter of Recession in Europe: Markets Wrap
- Nasdaq 100, S&P 500 gauges had worst week since March 10
- Powell says the US may need one or two more rate hikes in 2023
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