by Franklin J. Parker, CFA
Well, so much to a summer break.
Markets around the world are shedding price today with Japan’s main stock index closing down over 12%, and European markets also selling down. And this is after the Federal Reserve signaled last week that rate cuts are likely to begin in September. For years now, investors have looked to central bank rate cuts as a bullish signal. Today, however, it seems that investors have suddenly changed their minds and come to the realization that, in fact, central banks tend to cut rates when the economy is in danger of recession.
Let’s Connect
While it is always difficult to tell when “it” begins, this does feel like a strong shift in market senitment. Any regular readers will know that I have been cautious for some time now as the fundamental economic data has not been strong enough to justify such strong run-ups in stock markets. As I have mentioned many times by now, the Federal Reserve cutting rates at this stage is a recessionary signal, not a bullish one. Only now does the broader market appear to agree. And, of course, we cannot forget the trouble brewing in commercial real estate that is only now coming to a head, trouble that will likely spill into the broader global economy.
This is not a time for panic, of course. For our clients, we took steps to mitigate the risk of a recessionary market awhile ago. If, however, you are worried about how your portoflio is positioned, this may well be a good time to get a second opinion — something we would be happy to offer.
Chart of the Week
One recessionary signal that I follow is job openings as a percentage of the population. Typically, before a recession, job openings tend to top out and begin to fall. This metric was heavily skewed by Covid, however. After seeing a very large and sudden increase in job openings, we saw this figure move back down toward its pre-2019 trend (the blue dashed line).
The point is, over the past year or so, this figure has begun to move below its pre-2019 trend levels. In my view, this is recessionary because we are seeing fewer job openings than we would otherwise expect if the economy was still growing in line with the 2010 to 2019 trend.
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