Recession fears continue to roil financial markets

MANHATTAN (CN) — In another week punctuated by wild swings, investors followed up Monday’s massive sell-off with one of the best days in years to end the week basically where it finished last Friday.

Monday’s sell-off was an echo of last week’s negative sentiment following a surprisingly poor jobs report, with the Dow Jones Industrial Average losing more than 1,000 points S&P 500 suffering its worst day since 2022.

However, negatively soon turned positive as indices came roaring back Tuesday, even if not all the way back. By the end of the week, the Dow lost just 241 points, the S&P 500 only two points, and the Nasdaq a mere 31 points.

“The signs of slowing growth are obvious to all who care to look, but with a starting point of +2.8% GDP growth, it’s hard to believe a recession has already begun,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance, adding he believes the panic on Wall Street was “overblown.”

Michael Pearce, deputy chief U.S. economist at Oxford Economics, also wrote in an investor’s note that the sell-off was “an overreaction to what has been a steady weakening in the incoming economic data.”

Pearce added the unemployment rate increase to 4.2% was likely due to increased labor supply, not a greater move to layoffs, and that a slowing economy is what the Federal Reserve has tried to accomplish to beat back inflation. “With markets stabilizing, we would only reconsider our view if we saw a broader deterioration over the coming weeks.”

Despite last week’s disappointing jobs report, unemployment claims this week came in lower than expected. Just 233,000 initial claims were filed during the week ending August 3, according to the Labor Department, a decrease of 17,000 claims from the week prior.

Economists say the drop is likely due to special factors — namely, the end of summer auto plant shutdowns and the lingering effects of Hurricane Beryl — but note that continuing claims continue to inch higher. For the week ending July 20, continued claims hit 1.96 million, an increase of nearly 22,000 from the previous week.

“Investors have to be careful not to read too much into one report like they did recently with the last payroll report,” said Jeffrey Roach, chief economist for LPL Financial, noting that hiring is likely to slow for the remainder of 2024.

Roach also notes the Federal Reserve now has wiggle room if it wants to slash interest rates by more than the expected 0.25% cut next month. “If the data deteriorates quickly from here, the Fed could take more decisive action in September and cut by a half of a percent, which would provide some salve for markets,” he said.

Other measures show a U.S. economy that is still strong, even if it isn’t as strong as it was a year ago. The ISM services index released on Monday, for example, showed an increase to 51.4 from 48.8, which experts say shows an economy in transition and not one about to collapse.

For Wall Street, though, volatility is still extremely high. The VIX, known as Wall Street’s “fear gauge,” closed out Friday’s trading around 20 points. Over the past few days, the index has been higher than at any time since last October.

A higher VIX can be a blip, Nicholas Colas and Jessica Rabe at DataTrek Research wrote Tuesday, but it can also portend higher-for-longer volatility like that seen during the Great Recession and the Covid shutdown era.

“History shows that volatility tends to remain elevated once the VIX hits statistically unusual levels, as it has now done,” they wrote, adding that the Fed needs to be clearer about what kind of rate cut it may give in September to tamp down volatility.

“Such a large disconnect between markets and Fed guidance inevitably, and correctly, elevates stock market volatility,” they wrote.

Follow @NickRummell

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