Recession Fears?

The S&P 500 is down about 2% over the last couple of trading sessions on rising recession fears. High-fliers are taking a much bigger hit as speculators and traders pull in their horns. For example, Nvidia (NVDA) is down 9%. The VIX fear gauge ticked up to 20, but that’s rather modest compared to its jarring surge a month ago. So this isn’t exactly panic; gold is down slightly over the last two days. But money is flowing out of stocks and into the bond market. A widely held long-term Treasury bond fund is up 2% this month.

There are some emerging signs of slowing economic growth, probably because the Federal Reserve has kept interest rates unusually high for quite a long time. And yet, they seem poised to begin lowering rates later this month. Many think the Fed probably should have started that process earlier. Economist and author Jeremy Siegel says, “I think the Fed is there [at 2% inflation]. They should move much faster toward what they say is the neutral rate [of 2.8%].” Why take the risk of “tip-toeing” toward neutral when the battle against inflation is already won?

I’ll summarize a couple of reasons for concern. ISM’s manufacturing business activity index improved a bit last month, but unfortunately remains very weak. Hiring activity picked up but new product orders continued to soften. The manufacturing sector has been rather anemic for almost a year-and-a-half. And as I’ve mentioned in previous updates, corporate capital spending (outside of AI-related investment) is soft. Year-over-year growth in capital goods orders (excluding aircraft & defense equipment) has drifted between -2% and +2% all year.

This morning the Bureau of Labor Statistics (BLS) said the number of unfilled job positions in the US fell to 7.6 million in July. That’s the lowest since January 2021 and seems to suggest that the labor market is slowing. BLS data also show a small increase in layoffs and a slower pace of hiring in recent months. Bloomberg News says this report helped spark “fears about a potential recession.”

But I’ll point out that open job positions are only back to pre-pandemic levels and the job market seems to be normalizing rather than falling apart. Compared with past business cycles layoffs are not elevated. And the services side of the economy—much larger than manufacturing—is holding up OK.

Analyzing this macro & market environment calls for nuance. But at the moment traders don’t have an appetite for nuance. They seem prone to overreaction, and eager to call for recession. CNBC ran an article titled “The Recession Crowd Has Regained The Stock Market Narrative, For Now.” Reporter Bob Pisani acknowledges that “Someday the ‘recessionistas’ are going to be right. But they’ve been terribly wrong for two years, and anyone trying to time a recession would have lost a lot of money.”