For those on Wall Street who cling to the bullish view of the economy, life is getting tougher.
Worrying data, long predicted in bond and commodity markets, woke risk-asset traders from their slumber this week, in the worst performance of stocks since the regional banking crisis of 2023.
After recovering from an early August slump, traders succumbed to growth fears amid a steady drumbeat of discouraging economic news, particularly from the labor market. The S&P 500 fell for four straight days, credit spreads widened at the fastest pace since early August and an index of computer chip makers plunged 12 percent, the biggest drop since the pandemic crisis.
With the benchmark equity index up 13 percent this year, swings are a mere detail on bullish charts, and risk-sensitive assets are still largely pricing in a soft landing down the road. Still, the trading action, especially on Friday, was a rare example of agreement among cross-asset investors, who have never been more divided over the future of the economy since 2019, according to one gauge.
As more than two years of aggressive Federal Reserve policy take their toll, stocks last week (dragged down by economically sensitive companies) joined longer-lasting market declines, weighing on oil, copper and bond yields for more than a month.
“Investors may be waking up to recession risk right now, but only after hitting the snooze button ten times,” said Michael O’Rourke, chief market strategist at JonesTrading. “The environment has only deteriorated if subsequent economic data and earnings reports are anything to go by.”
Bond investors, historically labeled “smart money” for their propensity to anticipate economic changes, priced in faster interest rate cuts. This pushed two-year Treasury yields to the lowest level since 2022. The commodity complex also sent warning signals about the outlook for the consumption and investment cycle: oil erased all of its 2024 gains and copper fell in 13 of the past 16 weeks.
While markets have charted different paths into 2024, last week’s move has an obvious precursor: labor market weakness in early August. The latest flare-up reflects concerns that the economy may be stalling too quickly for the Fed to rescue without urgent policy correction.
JPMorgan Chase & Co.’s model, which compares asset movements to past cycles, showed that as of Wednesday, recession probabilities were relatively low in stocks and investment-grade credit (9 percent), but higher in commodities and government bonds (62 percent and 70 percent, respectively).
“I don’t think any market is really pricing in a reasonable chance of a recession, but the totality of the data suggests that the risks of a recession are growing,” said Priya Misra, a portfolio manager at JPMorgan Asset Management.
The divergence between stocks and bonds is striking: the S&P 500 closed August at a record high and two-year Treasury bonds reflect the conviction that Jerome Powell and company will be forced to implement a faster-than-expected pace of rate cuts. The yield curve is normalizing, raising new questions about its reliability as a harbinger of a recession.
First published: September 8, 2024 | 17:05 IS
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