The market reaction to July’s weak jobs report fueled concerns that the Federal Reserve made a mistake in keeping rates at a 23-year low at its last meeting.
And now, in some quarters of the investment world, the question is no longer when rates will fall, but rather when a recession will hit the U.S. economy.
But many economists and stock market strategists say that while recession risks have increased amid weak economic data, the last few days of market action have been an overreaction.
In an interview Tuesday, Torsten Sløk, chief economist at Apollo Global Management, told Yahoo Finance that the market is “pricing in too many discounts.” (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
Investors quickly priced in more than four interest rate cuts in 2024 after Friday’s jobs report, compared with three after the Fed’s July 31 meeting. Some market commentators have even suggested the Fed should cut rates before its September meeting.
Sløk added that given the volatile swings seen in market bets on Fed rate cuts in recent trading sessions, investors should take market forecasts with a “pinch of salt.”
Sløk pointed to data showing that consumers continue to spend on activities such as flights, dining out and hotel stays, to demonstrate that the consumer shows little sign of retreat at this stage.
“Overall, there is not much evidence that the economy is in recession or is about to enter recession,” Sløk said.
A different composition
The most worrisome aspect of the July jobs report was the rise in the unemployment rate to 4.3%, which triggered a closely watched recession indicator. The report also showed that monthly job gains slowed to their second lowest level since 2020.
But for Brett Ryan, senior economist at Deutsche Bank in the United States, the report still tells the same story, that of a labor market “supported by the absence of layoffs rather than by strong hiring.”
“The composition of the increase in unemployment is somewhat different than what you normally see at the beginning of a recession,” Ryan said.
The unemployment rate has risen largely because of an increase in labor supply (people entering the labor market for the first time or simply returning to work) rather than an increase in permanent layoffs, Ryan argued.
“You don’t want to overreact to any one data point,” Ryan said. “So there’s no question that risks have increased, which is giving the Fed an incentive to start with a more aggressive pace of rate cuts, but we’re not there yet.”
For example, weekly jobless claims recently hit their highest weekly level in nearly a year. But Ryan points out that if you exclude Texas, where flooding from Hurricane Beryl displaced workers, the four-week average of initial jobless claims is actually down.
Bank of America U.S. economist Michael Gapen took a similar stance, writing in a client note that without widespread layoffs, the case for a significant emergency rate cut due to labor market dynamics is weaker than the market appreciates.
“A September rate cut is now all but assured, but we do not believe the economy needs aggressive, recession-level cuts,” Gapen wrote in a note to clients Monday.
“Risk assets can recover”
Some strategists also see the market’s strong reaction to the data as an opportunity to be more aggressive in the stock market.
The BlackRock Investment Institute, headed by Jean Boivin, wrote in a note to clients Monday that it believes recession fears are “overblown.”
“We believe risk assets can rally as recession fears ease and the rapid unwinding of carry trades stabilizes,” the BlackRock team wrote. “We maintain our overweight stance on U.S. equities, driven by strength in AI, and view the selloff as presenting buying opportunities.”
Seema Shah, global chief strategist at Principal Asset Management, agrees.
Shah highlighted the market rebound Tuesday, telling Yahoo Finance: “What you’re seeing now is a bit of a reality check: Maybe the economic concerns aren’t as bad as we thought they were.”
Shah added that the key for investors in this market period remains whether the macroeconomic scenario has completely changed. For now, she believes the situation is the same.
“We expect the U.S. economy to slow, but we don’t expect a recession,” Shah said.
“We expect the Fed to cut rates, but not aggressively. So from that perspective, the backdrop hasn’t really changed for us.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
Click here for an in-depth analysis of the latest stock market news and events moving stock prices
Read the latest financial and business news from Yahoo Finance
