Investors are looking at a number of signals to predict if the economy is headed for a recession. And these signals – amplified by growing fear about the spread of coronavirus in the United States – are now flashing bright red.
The clearest signal comes from the stock market. The Dow Jones lost 1,800 points at the start of the session on Monday – a drop of 7% in addition to the drop of almost 12% since the benchmark reached a record level on February 19. The latest crisis has placed the Dow close to “bear market” territory, or when stocks fall at least 20% from their previous high.
Just a few weeks ago, many Wall Street analysts predicted that the U.S. economy could dodge all, or perhaps the worst, of the economic impact of the coronavirus and the deadly disease COVID-19 it transmits .
In January, Goldman Sachs predicted that the coronavirus would only reduce 0.4 percentage points of GDP in the first quarter of the United States. But almost all of this was due to a drop in tourists from China and a drop in Chinese exports. America’s own economy was likely to go unnoticed.
White House economic adviser Larry Kudlow called the virus “content”. Kudlow, in an interview with CNBC in February, a channel on which he was previously paid to provide economic information, said: “I don’t think it will be an economic tragedy.”
This prediction seems to have missed the twist of the plot. Markets are now indicating that a recession is the most likely impact the coronavirus will have on the economy. The good news, if there is any, is that none of this is out of the ordinary. While painful, this is exactly how the market acts when a recession hits us.
So why does the recent market downturn not seem routine? First, the coronavirus itself is a big unknown. Second, few experts have seen a recession coming. This drop in the market is far from the largest, but it is the fastest that stocks have fallen from an all-time high.
Here are three signs that the coronavirus epidemic is likely to lead to a recession, if it hasn’t already.
Oil prices drop 25%
Most of the world’s economies are heavily dependent on oil. This makes the price of oil a good indicator of the state of the world economy. And a look at oil prices now suggests that things are not going well.
Oil prices fell more than 25% this weekend to just under $ 35 a barrel, the lowest level of fuel in almost five years.
In 2015, oil prices plummeted $ 30 a barrel, yet the U.S. economy has always been able to avoid a recession. This time, however, the coronavirus is spread around the world.
Part of the recent price drop is related to supply. Saudi Arabia said this weekend that it will drive prices down and inject more oil into the economy. But the Saudis have already increased their production with little impact on world prices. The reason why prices are falling now is that experts believe there is not enough demand for all this extra oil.
“Saudi Arabia’s decision to cut oil prices and increase production has triggered the largest one-day drop in oil prices since the 1990 Gulf War,” said TD Securities analysts. to investors. “In addition, the COVID-19 spread is showing no signs of improvement.”
US government bonds hit record lows
On Monday, the yield on 10-year US Treasuries fell to just under 0.5%. That’s a full percentage point below the lowest they got in the aftermath of the financial crisis, which was 1.5% in mid-2012. It is also a new historic low for bond yields, which until a week ago had never been below 1% for 10-year public debt.
The new trough is not necessarily good news, as government bond yields are in part supposed to indicate what the market thinks that US economic growth will be. A bond return of 0.5% suggests anemic, if not negative, growth.
Dan Suzuki, portfolio strategist at Richard Bernstein, told Bloomberg that the main reason why rates were so low was because they predicted a global collapse in economic growth.
Bond yields move in the opposite direction of bond prices. The reason why yields fall is because investors are pricking bonds. US government debt is considered one of the safest investments. Thus, the rush of bonds to push yields to historically low levels suggests that the current mood of investors is an extreme fear.
American stock market losses of nearly $ 5 trillion
The market has dropped 18% in the past week and a half, losing just over $ 5 trillion in market value to S&P 500 companies. This is another bad sign. Each American recession has seen a 20% drop in stock prices. We are now about to get there.
The flip side is that if we are indeed heading for a recession, the current downturn in the stock market is nothing short of extraordinary. This slide just looks more scary than normal because of its speed. Declines in inventory generally take some time to materialize. But the coronavirus took the market by surprise.
Last year, the 500 shares of the S&P 500 brought in $ 165 per share. At the start of the year, these profits should increase by 10% to reach almost $ 180 per share. The current decline in the S&P 500, although significant, indicates that profits should now drop 10% this year. It is a recession, but only a slight one.
In a note to customers Monday morning, Goldman Sachs’ chief US strategist David Kostin said the company’s basic assumption was that the coronavirus epidemic was widespread but short lived. “Below the surface of the S&P 500’s downside, the sector’s performance has been ordered,” wrote Kostin. He also suggested that any recession we have would be brief. Earnings growth, predicted Kostin, will rebound to 6% next year.
This is not to say that the stock market is doing well. But at this point, it doesn’t look any sicker than an average recession. This is never great news. But given the state of the market and what investors seem to fear, it could also be reassuring.
Investors are looking at a number of signals to predict if the economy is headed for a recession. And these signals – amplified by growing fear about the spread of coronavirus in the United States – are now flashing bright red.
The clearest signal comes from the stock market. The Dow Jones lost 1,800 points at the start of the session on Monday – a drop of 7% in addition to the drop of almost 12% since the benchmark reached a record level on February 19. The latest crisis has placed the Dow close to “bear market” territory, or when stocks fall at least 20% from their previous high.
Just a few weeks ago, many Wall Street analysts predicted that the U.S. economy could dodge all, or perhaps the worst, of the economic impact of the coronavirus and the deadly disease COVID-19 it transmits .
In January, Goldman Sachs predicted that the coronavirus would only reduce 0.4 percentage points of GDP in the first quarter of the United States. But almost all of this was due to a drop in tourists from China and a drop in Chinese exports. America’s own economy was likely to go unnoticed.
White House economic adviser Larry Kudlow called the virus “content”. Kudlow, in an interview with CNBC in February, a channel on which he was previously paid to provide economic information, said: “I don’t think it will be an economic tragedy.”
This prediction seems to have missed the twist of the plot. Markets are now indicating that a recession is the most likely impact the coronavirus will have on the economy. The good news, if there is any, is that none of this is out of the ordinary. While painful, this is exactly how the market acts when a recession hits us.
So why does the recent market downturn not seem routine? First, the coronavirus itself is a big unknown. Second, few experts have seen a recession coming. This drop in the market is far from the largest, but it is the fastest that stocks have fallen from an all-time high.
Here are three signs that the coronavirus epidemic is likely to lead to a recession, if it hasn’t already.
Oil prices drop 25%
Most of the world’s economies are heavily dependent on oil. This makes the price of oil a good indicator of the state of the world economy. And a look at oil prices now suggests that things are not going well.
Oil prices fell more than 25% this weekend to just under $ 35 a barrel, the lowest level of fuel in almost five years.
In 2015, oil prices plummeted $ 30 a barrel, yet the U.S. economy has always been able to avoid a recession. This time, however, the coronavirus is spread around the world.
Part of the recent price drop is related to supply. Saudi Arabia said this weekend that it will drive prices down and inject more oil into the economy. But the Saudis have already increased their production with little impact on world prices. The reason why prices are falling now is that experts believe there is not enough demand for all this extra oil.
“Saudi Arabia’s decision to cut oil prices and increase production has triggered the largest one-day drop in oil prices since the 1990 Gulf War,” said TD Securities analysts. to investors. “In addition, the COVID-19 spread is showing no signs of improvement.”
US government bonds hit record lows
On Monday, the yield on 10-year US Treasuries fell to just under 0.5%. That’s a full percentage point below the lowest they got in the aftermath of the financial crisis, which was 1.5% in mid-2012. It is also a new historic low for bond yields, which until a week ago had never been below 1% for 10-year public debt.
The new trough is not necessarily good news, as government bond yields are in part supposed to indicate what the market thinks that US economic growth will be. A bond return of 0.5% suggests anemic, if not negative, growth.
Dan Suzuki, portfolio strategist at Richard Bernstein, told Bloomberg that the main reason why rates were so low was because they predicted a global collapse in economic growth.
Bond yields move in the opposite direction of bond prices. The reason why yields fall is because investors are pricking bonds. US government debt is considered one of the safest investments. Thus, the rush of bonds to push yields to historically low levels suggests that the current mood of investors is an extreme fear.
American stock market losses of nearly $ 5 trillion
The market has dropped 18% in the past week and a half, losing just over $ 5 trillion in market value to S&P 500 companies. This is another bad sign. Each American recession has seen a 20% drop in stock prices. We are now about to get there.
The flip side is that if we are indeed heading for a recession, the current downturn in the stock market is nothing short of extraordinary. This slide just looks more scary than normal because of its speed. Declines in inventory generally take some time to materialize. But the coronavirus took the market by surprise.
Last year, the 500 shares of the S&P 500 brought in $ 165 per share. At the start of the year, these profits should increase by 10% to reach almost $ 180 per share. The current decline in the S&P 500, although significant, indicates that profits should now drop 10% this year. It is a recession, but only a slight one.
In a note to customers Monday morning, Goldman Sachs’ chief US strategist David Kostin said the company’s basic assumption was that the coronavirus epidemic was widespread but short lived. “Below the surface of the S&P 500’s downside, the sector’s performance has been ordered,” wrote Kostin. He also suggested that any recession we have would be brief. Earnings growth, predicted Kostin, will rebound to 6% next year.
This is not to say that the stock market is doing well. But at this point, it doesn’t look any sicker than an average recession. This is never great news. But given the state of the market and what investors seem to fear, it could also be reassuring.