S&P 500 Investors Spooked by Prospect of Arriving Recession

As if investors didn’t have enough to consider with earnings season in full swing, bad economic data released late in the trading week raised new concerns of whether the U.S. economy is falling into recession.

July 2024 is, after all the most likely month the recession for which the recession forecasting method we’ve been following indicates would represent Month 0 of a new recession, marking the peak of economic expansion for the economy. But we won’t know that for some time to come, after the National Bureau of Economic Research might get around to making that determination.

Combined with jobs data that confirms rising the nation’s rising unemployment rate has triggered the so-called “Sahm Rule” signaling a near-real time indicator of the arrival of negative economic conditions, bears have taken charge of Wall Street as investors focus on the gathering recessionary storm clouds.

Unsurprisingly, that new information sent stock prices lower. The S&P 500 (Index: SPX) dropped a little over 2% from its previous week’s close, ending Friday, 2 August 2024′s trading at 5,346.56. As recently as Wednesday, 31 July 2024 had been over 1.1% higher than its previous week’s closing value as the Fed signaled it was set to begin cutting short term interest rates in September, so the bearish reversal is larger than it appears in the week-to-week change.

At this time, the dividend futures-based model‘s alternative futures chart indicates the trajectory of the S&P 500 remains consistent with investors focusing their forward-looking attention on the distant future quarter of 2025-Q2, though it is near the low end of range we would expect for that scenario.

Speaking of expectations for interest rate cuts, the CME Group’s FedWatch Tool forecast has changed. While the tool still anticipates the Fed will hold the Federal Funds Rate steady in a target range of 5.25-5.50% until 18 September (2024-Q3), when the Fed is expected implement a quarter-point reduction in this interest rate, it now projects future cuts will be much more frequent, with quarter point rate cuts taking place at six-week intervals.

Here are the week’s market moving headlines. Note the change in tone that takes place with the arrival of new information after Wednesday, 31 July 2024.

Monday, 29 July 2024

• Signs and portents for the U.S. economy:

• Oil falls by 2% as Israel officials seek to avoid broader Middle East war
• US home insurers suffer biggest loss of century in 2023

Fed minions expected to sit on their hands one more time, before finally snapping into rate cutting action in September 2024:

• Fed likely to hold rates steady one last time as inflation fight finale unfolds

• Explainer: The Fed nears its 2% solution after a punishing bout of rising prices

US yield curve nears flip with jury out on recession signal

Mixed economic signs developing in China:

• China’s industrial profits post faster gains in June despite faltering economy

BOJ minions being forced by inflation and falling currency into rate hikes they’d rather not:

• BOJ’s victory lap on deflation paves way for rate-hike cycle
• Japan’s top council urges govt, BOJ to guide policy with eye on weak yen

S&P 500 rises slightly ahead of key results, data, Fed meeting

• Nasdaq, S&P, Dow ended in a muted fashion as big tech earnings and Fed decision loom
• US stock turbulence throws spotlight on Big Tech’s valuations

Tuesday, 30 July 2024

• Signs and portents for the U.S. economy:

• Oil steadies near lowest since early June as China concerns weigh

Bigger trouble developing in China:

• China’s manufacturing activity seen extending decline in July
• China July non-manufacturing activity expands at slower pace

BOJ minions thinking about hiking rates when other central banks are getting ready to start cutting them, falling currency likely to force hand:

• BOJ to debate rate hike timing as Fed opens door to cuts
• Japan June jobless rate falls to 2.5%, job availability slips
• Yen weakens on last minute doubts about BOJ hike

Mixed economic signs in Eurozone:

• Euro zone economy grows but outlook far from rosy
• German economy unexpectedly shrinks in second quarter

S&P 500, Nasdaq stumble on caution ahead of tech earnings

• Drop in Magnificent Seven could drag down U.S. stocks, top fund manager says

Wednesday, 31 July 2024

• Signs and portents for the U.S. economy:

• Oil rebounds after Hamas leader killed in Iran, but China caps gains
• Tougher US credit conditions may help pave Fed’s rate-cut path
• Slowing wage gains restrain US labor costs in second quarter

Fed minions signal rate cut coming in September 2024:

• Fed’s Powell puts September rate cut on table as US inflation cools

• Fed’s Powell: Recent price data bolstering confidence inflation moderating
• Instant view: FOMC does not change rates, but sets stage for September cut

Bigger trouble developing in China:

• China’s factory activity contracts for first time in 9 months, Caixin PMI shows
• China’s weak factory PMI exposes pain points in export juggernaut

Mixed economic picture in Japan:

• Japan June factory output falls 3.6% m/m
• Japan June retail sales rise 3.7% year-on-year, better than forecasts

BOJ minions hikes rates, thinks about cutting back on quantitative easing, plans to keep bailing out Japan’s currency:

• BOJ raises interest rates, lays out bond taper plan

• Japan yields scale 15-year peaks, bank shares surge as BOJ hikes rates

Yen leaps after BOJ decision, month-end keeps currency markets nervy

• Japan’s new currency diplomat keeps intervention on table to stabilise yen

ECB minions looking to cut Eurozone interest rates get data they didn’t want:

• Euro zone inflation edges up in ‘difficult print’ for ECB

Nasdaq, S&P 500 post best day since Feb after Powell signals possible rate cut in Sept

• Gold climbs over 1% after Fed’s Powell hints at early rate cut

Thursday, 1 August 2024

• Signs and portents for the U.S. economy:

• Oil rises on risk of broadening Middle East conflict
• US weekly jobless claims highest in nearly a year amid summer volatility
• US manufacturing gauge drops to eight-month low
• US construction spending extends decline in June

Bigger trouble developing in China:

• Chinese factories poised for ‘cruel summer’ as PMI surveys raise outlook risks

Major central banks’ rate cuts gather pace

• Bank of England cuts rates from 16-year high, ‘careful’ on future moves

• Quotes: Bank of England cuts rates from 16-year high

BOJ minion says more rate hikes to come in Japan:

• BOJ governor’s hawkish streak signals more hikes to come

Nasdaq loses 2%, Dow tumbles as soft-landing optimism fades; Meta shares advance

• Stocks stumble on growth fears with US jobs data eyed

Friday, 2 August 2024

• Signs and portents for the U.S. economy:

• US unemployment rate hits 4.3% as job growth slows considerably

• A closely tracked recession indicator, the Sahm rule, has now been triggered. Here’s what that means.

Oil settles at 8-month low after disappointing US job numbers

US factory orders fall more than expected in June

Fed minions now expected to deliver bigger and/or more frequent interest rates as signs U.S. economy is faltering increase, Fed minion pushes back:

• Fed rate cuts loom large as job market slows sharply
• Fed seen cutting rates by half a point in Sept, after weak jobs data
• Fed’s Goolsbee: don’t want to ‘blow through’ full employment

Bigger trouble, stimulus developing in China:

• China’s stuttering recovery darkens global corporate growth outlook
• China needs more than ‘incremental’ consumer stimulus longer term

• China central bank adviser calls for greater stimulus, inflation goal

BOJ, JapanGov minions worried about falling currency:

• Japan warns of weak yen impact on households in government white paper

S&P 500 slides 2% for the week as narrative shifts to fears over hard landing, recession

• Nasdaq slides into a correction, S&P, Dow drop as jobs report heightens recession fears
• Fears for US economy send investors to safe havens, fuel stock slump
• Tech-heavy Nasdaq sinks into correction zone as equity selloff worsens

The Atlanta Fed’s GDPNow tool‘s forecast for real GDP growth during the now current quarter of 2024-Q3′s is +2.5%, down from last week’s initial estimate of +2.8% growth.

Image Credit: Microsoft Copilot Designer.. Prompt: “An editorial cartoon of a Wall Street bear charging through the stock market with a storm cloud labeled ‘RECESSION’ following it. “.