Amid a sea of red in U.S. stock markets on Friday, a fundamental shift in investor thinking is underway that analysts describe as “growth scare.”
A “growth scare” is characterized by a correction in anticipation of a slowdown in economic growth, even if such a slowdown has not yet been confirmed by the data. Dow industrial DJIA,
are poised for their longest weekly losing streak in 90 years and the S&P 500 SPX,
appeared to be poised to close in bearish territory, as investors flocked to Treasuries and the dollar as safe havens of choice.
To see: The S&P 500 is trading in bearish territory. How far could he fall?
Friday’s equity sell-off punished all sectors and all equity strategies – from value and small caps to growth, as well as consumer discretionary, energy, utilities, finance and technology. Economists at JPMorgan Chase & Co. JPM,
estimate that US household wealth has fallen from $5 trillion to $8 trillion in 2022, largely due to falling stock prices. And strategists at BofA Securities ranked U.S. stocks as the worst performing asset class this year, as well as the third biggest loser among global stocks ahead of only Chinese and German stocks, based on data so far. See you on Wednesday.
Previous rounds of US equity selloffs this year were largely driven by the prospect of interest rate hikes from the Federal Reserve, which is trying to stifle the highest inflation in four decades. While the risks of a recession or an economic slowdown lingered in the background, they had not been highlighted. Many financial market participants remained convinced that the United States can avoid a slowdown or talk about risks of recession in the next two years.
Data released in April shows the US economy shrank 1.4% in the first quarter, largely due to a record US trade deficit, after GDP rose 6.9% in the past few months. last three months of 2021. The National Bureau of Economic Research defines a recession as a significant decline in activity lasting more than a few months.
But deteriorating stock values and financial conditions may have the potential to hasten the expected arrival of an economic downturn, some traders say.
“For much of this year, we have seen a positive correlation between stocks and bonds: that is, a sell-off in stocks and a sell-off in bonds,” said Subadra Rajappa, head of of the American rate strategy at Société Générale. “Now we see that a rally in bonds corresponds to a sell-off in equities. The subtle change is that bonds are starting to act as a safe haven, suggesting fear of growth and the potential for demand destruction that leads to weaker growth.
“Obviously, the stock price action this week is driven by earnings forecasts and forward-looking consumer spending forecasts, signaling the potential for a pullback,” she said by phone. Still, Rajappa said she saw no “concrete evidence” of a recession in the data, although slowing growth could not be ruled out. It also does not foresee a serious risk of recession over the next 12 months.
On Friday, there were 59 prior negative earnings per share announcements released by S&P 500 companies for the second quarter, and 32 that were positive, according to Refinitiv’s S&P 500 Earnings Dashboard. This compares to 55 who were negative and 28 who were positive a week ago.
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Meanwhile, the flight to safety in government bonds was felt hardest in the longer maturities, sending 10-TMUBMUSD10Y,
and 30-year rate TMUBMUSD30Y,
less than 2.8% and 3% respectively. Yields fall when demand for bonds increases.
The bond price action caused spreads to narrow between the 2-year TMUBMUSD02Y,
and 10 years, as well as between 5 years TMUBMUSD05Y,
and 30-year rates, which are seen as worrying signs about the outlook. Moreover, the 5-year rate traded above the 10-year rate, inverting this part of the curve.
Meanwhile, the ICE US Dollar Index DXY,
rose 0.5% to 103.24, not far from some of the highest levels in nearly 20 years.
In the past two years since the pandemic began, US household wealth has increased by $30 trillion, JPMorgan’s chief US economist Michael Feroli said Friday. In a sense, the market is “recovering a bit after a period of strong gains and households are generally likely still sitting on unrealized gains over the past year,” he said.
JPMorgan does not yet forecast a recession and expects U.S. growth to remain positive through next year, Feroli said. “But the risks are quite high and over the next couple of years it’s a question of whether we go into a recession.”