Nearly all asset classes are selling off, with Asian and European equity markets down considerably overnight on fears of a global recession and the inflammation of tensions in the Middle East. The VIX index (volatility index for S&P 500 based on 30d options) spiked from 20 to 65 intraday (before paring that back to 33), rivaling the levels witnessed during the pandemic and global financial crisis. Over the weekend, around $280B was shaved off of cryptocurrency’s total market cap (now at $1.9T) with long liquidations of $459M in bitcoin and $381M in ether over the last 24 hours. Even traditional “safe haven” assets like gold have declined materially.
In our most recent Weekly Market Commentary, we noted that “jitters over US economic growth seem to be weighing on investor sentiment far more than optimism over potential Fed rate cuts later this year.” Indeed, market players are now pricing in a 50bps cut by the Federal Reserve in September (up from 25bps) and nearly 125bps total for the year, based on Fed funds futures.
The definition of a technical recession is two consecutive quarters of negative GDP growth, though currently, many are looking at the US unemployment rate and applying the “Sahm rule" (see footnote 1). But that means to expect a recession in 4Q24, the economy would have to show signs of not just cooling but actively contracting now. We don’t believe that’s what’s happening. In our view, the easing in labor demand has more to do with secular trends like the AI transition, which should eventually give way to stronger productivity in the long run. That said, a few weeks ago, we acknowledged that there have been more forecasts for recession lately and that investors should be wary.
What’s next? We believe that these market jitters will persist in the short-term, but it’s possible that shorts could get squeezed here, which could lead to a market rebound in the next few days. But don’t be fooled into thinking that this market disruption is over. Crypto still has some technical factors weighing on it, like in-kind BTC and ETH distributions by Genesis as part of its bankruptcy liquidation plan. The unwind of JPY-based carry trades may also be affecting the decisions of Mt. Gox creditors receiving their BTC at the moment. That said, the moves here have so far been orderly, and we expect that to continue.
Meanwhile, recession fears could yet intensify, even though Monday’s economic data (e.g. ISM services) have helped assuage fears somewhat. We think this phase may last through the Fed decision in mid-September. Consequently, we retain our forecast for a choppy market in 3Q24 but also believe that this pullback does not represent the start of a new market cycle. Rather, the current sell off is consistent with our defensive approach in 3Q24 and more constructive outlook for 4Q24, albeit the strength of this move tests our conviction.
