We are now deep into uncertain territory, as the thesis “this time is different” is being tested by reality, and for now, reality is winning. Investors are running from one side of the boat (hopefully not the titanic), to the other, as a fear of recession iceberg looms for investors still leveraged to the gunnels in AI tech, are hopelessly wrongly positioned for such an event.
I can show you thousands of reports claiming this time is different – plenty suggesting the long inverted bond yield curve had lost its power to predict a recession; plenty arguing extreme share market concentration was no big worry; plenty arguing that the mini bubble in artificial intelligence was nothing like what we saw in the DotCom era. But now, (as expected), all those beliefs are being challenged by a perfect storm of market fears. Even though talk of broad recession still seems far-fetched, with real-time U.S. GDP estimates still tracking growth of 2.5%, fears of a negative pulse through the industrial world from a stuttering Chinese economy have been building for weeks.
A series of ugly data points also inflamed investors’ recession fears. There was the weaker than expected data on job openings and a manufacturing activity gauge that showed US factories are going backwards with data showed U.S. manufacturing activity contracted at the fastest pace in eight months in July. And then US non-farm payroll data showed the US economy added 114,000 jobs in July, compared to expectations for 170,000 jobs, while the unemployment rate rose from 4.1 per cent to 4.3 per cent. Did Hurricane Beryl, which knocked out power in Texas and slammed parts of Louisiana during the payrolls survey week, contributed to the below-expectations payrolls gain? Notably, June’s labour market data was also revised down; downward revisions have now occurred six out of the last seven months. We are close to a possible triggering of the so-called ‘Sahm rule’ that maps the pace of a rising U.S. jobless rate against the onset of recession.
And this to me could be said of the broader markets too, hard to read from here – the likelihood of more declines and rotations from big tech are there, at least until NVidia’s next update, while markets might now have swung too far towards recession fears (remember traders make money from volatility). A very interesting time heading into the next RBA meeting… and a continue to believe markets will slide into September. Perhaps now the FED PUT is in play, again..
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