Stock Market Crash: Is a US Recession Coming?

Global stock markets plunged over the weekend due to concerns about a US recession, and all three major US stock indexes fell sharply on Monday.

Dow Jones Industrial Average falls Over 1,000 pointsThe S&P 500 and Nasdaq both fell more than 3%, marking the S&P 550 Biggest one-day drop Since September 2022. Japan’s Nikkei index fell after Worst day since the 1987 Black Monday crashdown 12.4%, European market I have struggled too.

The huge losses suggest that investors are panicking about: Last week’s report It showed that the U.S. added just 114,000 jobs in July, below expectations for around 150,000, and the unemployment rate rose to 4.3% – higher than any month since October 2021. These numbers themselves do not represent a crisis: the unemployment rate is still relatively low and the poor hiring performance is not catastrophic, but both data are seen as signals that cracks may be appearing in the U.S. economy.

Although many economists US expected to avoid recession The reports have reignited concerns that a U.S. recession could still happen, despite the fact that it is happening, following the pandemic-induced recession, with potentially catastrophic consequences for the global economy. On Monday, Goldman Sachs lowered the odds of a recession next year from 5.1% to 1.3%. 15% to 25%.

It’s too early to tell whether these recession fears are real. But it may be too early to panic. The U.S. economy is not just Should be good — It’s actually in very good condition.

“There are some signs of a slowdown,” said Matt Colyar, an economist at Moody’s Analytics. “But the fundamentals that make us relatively optimistic about the U.S. economy haven’t changed.”

The rise in unemployment “scared a lot of people,” Collyar said, because it triggered the so-called Sam’s Rule, a clear sign that a recession could be imminent. The rule kicks in if the three-month average unemployment rate rises by at least half a percentage point from the previous year’s low. It has successfully predicted every U.S. recession since 1970.

However, Claudia Sam, the economist for whom the rule is named, is not convinced that Sam’s rule will be a reliable predictor this time around. So far, the post-pandemic economy has defied other historical recession indicators: For example, most bond strategists surveyed by Reuters earlier this year said the patterns they were looking at were so unusual that they No more bond yield curves Be predictive.

“If Sam’s Rule is triggered, it will join a growing list of metrics and rules of thumb that are not up to the task.” Sam told the Associated Press That was before last week’s jobs report.

One reason Sam’s rule may not be as useful this time around is that the rise in unemployment is not being driven by layoffs but by more people entering the labor force. A strong increase in the labor supply is not necessarily a sign of a recession, Collier said.

“(The unemployment rate) may continue to grow,” he said. “But for now, the labor market is not flashing red, it’s just slowing down.”

But the poor jobs report wasn’t the only factor driving the global market sell-off; Arbitrage Trading Financial market volatility may also have played a role.These trades involve investors borrowing a low-interest currency, such as the yen or Swiss franc, and using it to buy higher-yielding investments, such as U.S. Treasuries.

Due to the Japanese yen 11% appreciation against the US dollar A month later, those trades no longer looked good for investors. While it’s hard to determine in real time, Kolyar said investors were likely “closing positions to minimize losses” and moving money into safe-haven securities like U.S. bonds, sending the Nikkei tumbling.

Goldman Sachs also warned against reading too much into recent market volatility. The bank said in an analysis on Monday that it sees “limited” recession risks, does not “see major financial imbalances,” and while it may have raised its forecast for recession risk, the Federal Reserve still has ample room to intervene to protect the economy.

The Fed is expected to cut interest rates as early as its September meeting — or, unusually, Maybe even before that — This will provide relief to borrowers and businesses. Now that inflation has fallen to Close to the Fed’s 2% target rateMoody’s Analytics expects the Federal Reserve to gradually ease high interest rates by cutting rates twice before the end of the year, in September and December. This could go a long way toward stabilizing the stock market.

“Households are in good shape, businesses continue to hire at a solid pace. Businesses and households are also handling their debts relatively well,” Collier said. “So we think the (Fed) can ease policy relatively slowly. … There is evidence that the economy is more resilient than previously thought.”