Stocks Sustain Sharp Losses on Recession Fears; Bonds Rally

Good morning,

In a holiday-shortened week, the Dow (-2.9%), NASDAQ (-5.8%), and S&P 500 (-4.2) sustained sharp losses, with the S&P 500 exhibiting the worst 4-day start to September since 1946.  Meanwhile, taxable bonds gained about 1.3% and tax-free municipal bonds gained about 0.5%.  The gains in bonds were spurred by the 10-year Treasury yield falling 0.20% to 3.72%.

Multiple economic reports were released last week, many of which exhibited concerns of a weakening economy.  The ISM manufacturing report ticked slightly higher, but remained in contraction territory.  On a more favorable note, the ISM services (the larger of the two sectors) report ticked slightly higher for the month.  However, the all-important jobs data wasn’t as rosy.  The August jobs report showed that only 142,000 jobs were added for the month, and that the prior two months of data were corrected downward.  Similarly, the Jobs Opening and Labor Turnover Survey (JOLTS) showed that available jobs fell to their lowest number since January 2021.

So, what does all that data really mean?  The data is showing that the economy is definitely slowing, but the real question is how much, and will it result in a recession?  The stock market behaved like we might be heading to a recession, but it could also be an over-reaction, or simply profit-taking that is bringing the markets back to reality.  That said, all eyes of investors and economists are on the Fed meeting next week, and whether the Fed will lower interest rates by 0.25% or 0.5%.  At this point, the bond market is pricing in a 50% chance that it will be cut by a full 0.5%, but the bond market has seemingly been wrong more times than it’s been right this year.  Some argue that if the Fed cuts rates by 0.5%, then that could spook investors into believing the Fed is worried about the economy, rather than taking a slower, systematic approach.  The yield curve has been inverted for two years now, and that has historically pointed to a recession – yes, one that still hasn’t happened yet.  The yield curve is “normal” again, but I just read a report that stated the last four recessions only began after the yield curve normalized.  Oh, boy.  September has historically been the weakest month of the year, and it’s certainly pointing that way again.  Let’s get ready for a bumpy ride the next couple weeks.

Have a great day and terrific week!

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