Does Recent Market Volatility Signal a Recession Ahead?

The recent market selloff has some pundits and investors predicting disaster. Mitch argues that it’s essential to look at what is driving the selling pressure. [Mitch on the Markets] What To Make of Heightened Market Volatility 2024 has mostly been a year of strong stock market returns with relatively subdued volatility. I have previously noted that through the first six months of the year, there was only one instance when the S&P 500 index rose or fell by more than 2% (in that instance, it went up).1 The breezy days of equity market investing in 2024 gave way to a storm in late July and early August, with the S&P 500 at one point declining -8% in just 14 trading days. On Monday, August 5, U.S. and global stocks suffered a rout with volatility rivaling trading days during the 2008 Global Financial Crisis and the 2020 Covid-19 crash. Investors, understandably, are worried about what may come next. I am not writing to tell you the volatility is over. Volatile patches tend to happen in clusters, particularly if we see a sudden shift in sentiment—which I’m seeing signs of now. [Navigate This Volatile Market with Expert Insights]( Are you prepared to navigate the storm of market volatility? Instead of trying to ‘time the market’ as volatility fluctuates, I recommend reviewing my latest market insights and critical data included in [Zacks’ August Stock Market Outlook 2]( to make informed, strategic decisions in these uncertain times. It covers other relevant factors, such as: - Capital markets commentary: Is the S&P 500 too concentrated? - Key U.S. economic data - Global market data - Zacks S&P 500 earnings insights - Zacks sector picks - And more… Don’t miss the chance to arm yourself with the knowledge to act decisively and protect your investments before the market shifts further. If you have $500,000 or more to invest, request [free August Stock Market Outlook Report 2]( today! [Download Our Brand New Stock Market Outlook Report]( [Claim Your Free Report]( Every day seems to bring a new story that the U.S. economy is cracking, and that the Federal Reserve is too far behind on rate cuts to make a difference. Headlines have also focused on the Bank of Japan’s rate hike and the unwinding of a massive “carry trade,” whereby investors borrowed in Japanese yen (at very low interest rates) to buy riskier, high-yielding assets—like U.S. stocks. When the Bank of Japan decided to raise rates, many investors had to suddenly unwind these trades, and automatic sell orders likely kicked in once the selling pressure started, exacerbating the declines. This setup is not without real, short-term risks. But when I step back to assess the macroeconomic and broader equity market implications, I see technical and sentiment-based drivers of selling pressure—not fundamental-based drivers. In my reading of stock market history, the drawdowns tied to shifts in sentiment or technical factors tend to be sharp, sudden, scary, but also short-lived. The “Black Monday” crash in 1987 ended up being a very short-term panic that did not reveal a deeper economic fracturing. The same goes for the 1998 Russian ruble crisis, which led to the collapse of Long-Term Capital Management. Despite the frenzies, the stock market finished positive in both years. I want to restate here that I am not implying the current bout of volatility is over. Corrections can last a few days, a few weeks, or even a few months, with equities often declining between -10% and -20%. U.S. stocks are not quite there yet, but if declines did indeed continue, it would be normal. Since 1980, the average intra-year decline for the S&P 500 is -14.3%, which reminds us that downside volatility is not an anomaly of equity investing—it’s a feature of it.3 What I am instead arguing is that I am not seeing significant fundamental drivers tied to this downside volatility, which convinces me that this is not the beginning of a bear market. To support my argument, I’d point to the very report that many investors are skeptical of: the July U.S. jobs numbers. The 114,000 new jobs added were well below the 185,000 expected, sure. But the Labor Department also reported that average hourly earnings were up 3.6% in July from a year earlier, which is well above the latest inflation rate (3% CPI) posted in June. In other words, ‘real’ wages are still rising for Americans, which bolsters overall spending power. As for the rise in the unemployment rate from 4.1% to 4.3%, it was largely due to more people coming off the sidelines to look for jobs, versus people losing their jobs due to layoffs. According to the household employment survey, 67,000 people found new jobs in July, but 420,000 new people entered the workforce. That pushed the labor-force participation rate up to 62.7% in July from 62.6% in June. While this move feels insignificant, the unemployment rate would have stayed at 4.1% without the increase.4 As for the Japanese yen and the unwinding of the carry trade, it is noteworthy that the Nikkei Index rose 10% on the day following the -12% sell-off, which in my view, indicates that a relatively small number of investors rushed to unwind trades. Historically, it can take a few weeks for bad trades to get cleared out, so I would expect some level of additional volatility in the coming days and weeks. But this issue and the information surrounding it is also widely known at this stage, and I do not see any real connection to U.S. economic fundamentals or the earnings outlook for the balance of 2024—which tells me to stay the course. Bottom Line for Investors Incomplete versions of the sharp market selloff last Monday would cite the near record-setting move on the Cboe Volatility Index, or the VIX. At one point in the trading day, the VIX reached 65.73, the third highest level only behind the 2008 Global Financial Crisis and the 2020 Covid-19 crash. What these stories tend to leave out, however, is that by the end of the day the VIX had retreated to 38.57, which is far less historic and far more ‘just a bad day in markets.’ It’s also true that the action was far more pronounced in the options contracts that make up the VIX, not the underlying stocks they track. The issue that often troubles many investors – and ultimately hurts them – is that they let volatility increase their temptation to “time the market,” allowing short-term uncertainties to drive their decision-making. But it’s important to remember that volatility works both ways. Rapid declines are often followed by rapid recoveries, which we may see now. Should the volatility continue, and you begin to feel the urge to react and ‘do something about it,’ I’d strongly advise you to stay patient and reconsider. If your goals have not significantly changed in the last few weeks, then your investment portfolio should probably not change, either. In times like these, relying on well-researched insights rather than gut reactions is crucial. To help you navigate this period with clarity, I’m offering our comprehensive [August Stock Market Outlook Report 5](. This report provides clear analysis and practical insights to help you stay on track with your investment strategy, such as: - Capital markets commentary: Is the S&P 500 too concentrated? - Key U.S. economic data - Global market data - Zacks S&P 500 earnings insights - Zacks sector picks - And more… If you have $500,000 or more to invest, request our free Stock Market Outlook Report today! [Claim Your Free Report]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. [Mitch on the Markets] Talk to a Zacks Wealth Advisor today. [Schedule Your Chat]( [facebook]( [linkedin]( [twitter]( © Zacks Investment Management | [Privacy Policy]( 1[Wall Street Journal. July 30, 2024.]( 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3[J.P. Morgan. 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