False alarm no longer? Recession fears continue to spook US stock market

FOR the second time in a little over two months, the US stock market is experiencing fears of a recession. This time, it might not be a false alarm, with dire economic data in China and some early signs of the US following suit.

In early August, the S&P 500 plunged 10 per cent as traders feared that the US Federal Reserve would act too late to save the US economy from a major recession.

September began with almost exactly the same pattern. The US central bank is almost certain to cut rates by at least a quarter of a percentage point at the end of its two-day meeting on Wednesday (Sep 18), but the stock market is behaving as though that’s too little, too late.

The 4.7 per cent expansion reported by China for the second quarter might be enviable for most economies, but it was almost half-a-percentage point short of targets for the nation that remains the workshop of the world.

Chinese President Xi Jinping is already contending with a property-market crash and bracing for a likely escalation in a trade and tech war with the US.

Economists say the situation in China will continue to deteriorate, unless Xi allows his hand to be forced on a stimulus programme.

In a global economy, economic slowdowns are notoriously contagious.

Recent data is not consistent with the US economy falling off a cliff, but there is ample evidence of teetering on the edge of one.

Job openings are at the lowest level since the tail end of 2019, finally bringing an end to the era of employers complaining about labour shortages. Home prices are growing at the slowest rate since the start of the pandemic in early 2020.

Home sales have all but frozen as buyers await the Fed’s next move. One North Texas realtor said activity is so sluggish in the region – one of the hottest markets in the US over the last decade – that one buyer he represented negotiated a hefty US$150,000 discount on a house.

Some long-established companies are flying the white flag: discount chain retailer Big Lots has filed for bankruptcy, and corporate Chapter 11 filings are up sharply from a year earlier.

On Sep 10, oil futures hit a nearly three-year low after the Organization of the Petroleum Exporting Countries cut its consumption forecast.

A senior executive at auto-and-appliance lender Ally Financial warned that inflation was hurting Americans’ ability to pay back debts.

And most worryingly, Jamie Dimon, the chief executive of the largest US bank, JPMorgan Chase, said there’s still a significant risk of “stagflation”, a scenario where consumer prices rise at the same time as a recession sets in.

For chart-watchers, the leading indicators for an impending recession are myriad.

In July, the Sahm Rule – which stated that a 0.5 per cent increase in the unemployment rate within six months means a recession is under way – was fulfilled (the unemployment rate then ticked down).

For more than two years, the yield curve was inverted, meaning investors viewed short-term US debt as riskier than long-term debt – an event that, intuitively, should only happen if the US economy was contracting.

Some observers have pointed out that investors have fretted about a recession ever since the bull market took off in September 2022.

The stock market is beginning to sound like the “boy who cried wolf”, said Jim Paulsen, an independent Wall Street strategist.

“In my career dating back to 1983, I don’t remember any other economic expansion with such widespread persistent recession fears,” he said, noting that such fears seem to fade as quickly as they set in. For investors willing to hold their noses and buy stocks during these violent scares, Paulsen noted, the bargain-hunting has paid off for two years.

“Undoubtably, this stock market has benefited from climbing a perpetual recession wall of worry which continues till today,” he said.

What’s clear is that there’s some kind of landing going on, although the debate is still raging on Wall Street over whether that landing will be hard or soft. 

The next six months will determine whether the Fed will be remembered as expert managers of an economy beset by a global pandemic and an inflation spike afterwards; or a central bank that let inflation get out of control before hiking rates, then allowed a recession to set in before cutting rates.

Many Fed officials have noted in the rate-hiking cycle that central-bank policy comes with a lag effect. If the US is already heading for a crash landing, a rate cut this week may not be enough to save it.

In the best-case scenario, the Fed has succeeded in saving the US economy like a skilled surgeon, cutting and hiking rates without puncturing any economic arteries.

In the worst-case scenario, the central bank has raised rates too aggressively and for too long, and the recent wobbles in the economic data are a trickle of blood that reveals a much deeper wound.