The U.S. stock market crash, fueled by pessimism about the economic outlook, is raising the risk of a recession that is coming sooner than many professional forecasters expected, traders and investors said.
The drop in share prices has contributed to Household wealth of $5 to $8 trillion This year, now comes with a weak corporate outlook.Analysts cite a revenue and profit warning from Snapchat’s parent company Snap Inc.
That was the main reason for Tuesday’s rout in tech stocks and the safe-haven of government bonds.
Forecasters tend to talk about the risk of a U.S. recession on a one- to two-year time horizon. Economists surveyed The Wall Street Journal in April averaged a 28% chance of a downturn next year.At the same time, in May National Association of Business Economics The median forecast shown was for inflation-adjusted U.S. fourth-quarter growth to slow to 1.8% year-over-year. More than half of respondents believe there is a greater than 25% chance of a recession in the next 12 months.
A factor that may not yet be fully incorporated into the market’s or forecasters’ views is how quickly worsening financial conditions can affect the day-to-day decisions companies make and spill over into the economy.S&P 500 on track the worst According to Dow Jones Market Data, a new year has started 100 trading days since 1970. For the Nasdaq 100, it’s on track to be the worst index ever.
and Salesforce Inc. CRM,
Meanwhile, streaming giant Netflix Inc. NFLX,
and PayPal Holdings Inc. PYPL,
“The impact of financial markets has in many ways contributed to overheating and higher prices,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, which manages more than $33 billion in assets in Horsham, Pennsylvania. Asset prices will work in the opposite way: the wealth effect and the psychological impact that the market is telling people could spiral upwards.
“A slowdown in growth is almost certainly a possibility, and the more asset prices fall, the more likely a recession will occur,” he said by phone. This dynamic was also seen in the 2008 financial crisis, It stems from “a confluence of events, but part of the equation has to do with a complete evaporation of market liquidity and a huge bear market in stocks”.
U.S. data released on Tuesday showed that New Home Sales plunged in April, Business expansion at its slowest pace in months. However, other recent data suggests that U.S. consumers remain healthy, retail sales Last month was solid, but optimism was quickly overwhelmed Earnings not reached From retailers like Target Corp. TGT,
U.S. Economy shrinks by 1.4% In the first quarter, the tightening led to a record high in the U.S. international trade deficit, following the surged 6.9% in GDP for the last three months of 2021. The National Bureau of Economic Research defines a recession as a significant decline in economic activity that lasts more than a few months, making it difficult to see when economic activity has begun.
“The previous thinking in the market was that inflation and the Fed’s efforts to end it would put us in a recession,” said Rob Daly, head of fixed income at Glenmede Investment Management in Philadelphia, which manages about $4.5 billion in fixed income. assets. “But now the market’s repricing could lead us into a recession with slower growth. Those opportunities are definitely increasing every day.”
While he sees the possibility of a slowdown in U.S. growth turning into a “mild recession” by the end of 2023, Daly said, “There are concerns that it could spread to our doorsteps faster. I don’t want to make myself look like It’s like vouching for a recession, but there’s definitely a lot of things that can lead to a slowdown.”
The list of downside risks plaguing financial markets and the economy includes: inflation at a 40-year high, an imminent Fed rate hike, Russia’s war in Ukraine, supply chain disruptions, China’s COVID-19 lockdown, and more U.S. coronavirus cases.
Glenmede’s Daly said investors were grappling with valuation issues earlier this year as the Fed began raising interest rates from near zero, leading to a correction in asset prices.
Now, the market is “starting to see the possibility that inflation won’t be brought under control as quickly as we would like, and that the strategies of central banks — not just the Fed — will dampen growth, which could push us down faster than we can. . We want to,” Daly said by phone. “The bond market is pricing in this lower growth scenario and taking some cues from the stock market, but not necessarily how much it thinks the Fed will raise rates.”
A strong rally in bonds pushed 2- TMUBMUSD02Y on Tuesday,
and the 10-year Treasury bond yield TMUBMUSD10Y,
fell to its lowest level in more than a month. At the same time, the Nasdaq Composite Index COMP,
fell 2.4%, or outperformed the S&P 500,
and the Dow Jones Industrial Average,
Barely made a profit.
While many investors have long braced for a brighter economic growth outlook, the unwinding of those trades is causing more market pain. Globally, funds investing in long/short equity strategies have all lost money this year, according to a performance review compiled by HSBC Alternative Investments Group.
The group of hedge fund managers known as the Tiger Cubs who have flocked to tech stocks are taking a beating.and Melvin Capitalit took a shower on GameStop and meme stock and was forced to liquidate, seen as a possible reason last wednesday Broad stock sell-off That led to the biggest one-day losses for the Dow and S&P 500 in about two years.
“The economy is slowing, and it may be slowing sharply,” said Gregory Faranello, head of U.S. rates at broker-dealer AmeriVet Securities in New York.
“Can we get into a recession sooner than people expect? The answer is yes, but we’re going to need more time to look at the data,” he said. “It’s not that we’re backing that, but we’ve had a very dramatic repricing across the board in a short period of time, which is going to hit the economy. We’re starting to see signs of that.”