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Concerns of Economic Slowdown Push Stocks Lower

��������������:��Investor worries of a global economic slowdown sent stocks lower across the globe last week. In the U.S., the S&P 500 index closed the week 2.1% lower, as a weak jobs report and soft manufacturing data added to a volatile week of trading. On Friday, the CBOE volatility index (VIX) rose to a level of over 53, its highest level since the early days of the pandemic in 2020. Fears of a U.S. recession was cited for the global market selloff after Friday’s disappointing July jobs report, as nonfarm payrolls showed job gains of 114,000 from the prior month, well below consensus expectations. In addition, the unemployment rate rose to 4.3%, against consensus expectations for an unchanged reading relative to last month, triggering the so-called Sahm Rule (see next section). In the bond markets, interest rates fell sharply, with 2-Year and 10-Year Treasury notes closing the week at yields of 3.87% and 3.79%, respectively. The falling yields translated to strong weekly returns for bonds, as the taxable bond index finished the week 2.4% higher in total return, while municipal bonds added 1.0% on the week. At its policy meeting last week, the Federal Open Market Committee (FOMC) left the federal funds rate unchanged, while conceding the recent increase in the unemployment rate, but stating it “remains low.”  Investors are concerned the Federal Reserve may be behind the curve in cutting interest rates to bolster an economic slowdown. Looking ahead to this week, economic reports will be light, with markets focused on the Monday July ISM Services report. This is a measure of the health of U.S. services companies and is expected to rise to a level of 50.9, up from 48.8 in the previous month. 

Update on Labor Markets and the Sahm Rule (from JP Morgan): Last week’s jobs report showed the labor market is losing momentum at a faster-than-expected pace. While a 4.3% unemployment rate is still historically low, it has risen 0.6% since January, marking the fastest rise in a six-month period since the pandemic. Much attention is now turning to the Sahm Rule, an economic indicator developed by Claudia Sahm that is designed to provide a real-time signal of the onset of a recession. It has accurately signaled all 12 U.S. recessions since 1947. In the four most recent recessions, the Sahm Rule coincided with their onset. The July jobs report caused the three-month moving average of the unemployment rate to exceed its lowest level over the prior 12 months by 0.5%, triggering the Sahm Rule. While the Sahm Rule is now causing concern, it should be noted that many other so-called recession indicators, like yield curve inversion, have been flashing red for a while without a recession occurring. While the economy continues to slow, broader data, including growth and PMIs, are far from recessionary levels. Against this backdrop, investors may want to evaluate their equity exposure, given strong performance in recent years, and focus on quality companies. Bond yields have already dropped around 65bps since the end of June, highlighting the value of bond duration in hedging equity risk. Investors may also want to correct underweights in core bonds, which can reduce portfolio volatility. Last week, while stocks were down 2%, core bonds were up 2%, reminding investors that bonds typically provide support during periods of growth concerns.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg, Factset, CNBC.

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