The chances of a market-led recession coming sooner than expected are increasing, investors and traders say.

A collapse in US stock prices, fueled by pessimism about the economic outlook, is raising the risk of a recession coming sooner than many professional forecasters anticipate, traders and investors say.

The fall in stock prices has already contributed to the disappearance of $5 to $8 trillion in household wealth this year, and is now accompanied by weaker corporate prospects. Analysts cited a revenue and earnings warning from just one company, Snapchat parent Snap Inc. SNAP,
as the main reason behind Tuesday’s slide in tech stocks and a flight to safety in government bonds.

Forecasters tend to talk about the risks of a US recession in terms of one- to two-year horizons. Economists surveyed by The Wall Street Journal in April estimated the probability of a recession over the next year to be 28%, on average. Meanwhile, a May survey of 53 forecasters by the National Association for Business Economics shows that the average expectation is for inflation-adjusted US growth to slow to 1.8% year-over-year in the fourth quarter. More than half of those surveyed assigned a probability of more than 25% that a recession will occur in the next 12 months.

What may not have been fully accounted for in the markets or forecasters’ views yet is how quickly deteriorating financial conditions can affect the day-to-day decisions that businesses make and ripple through the economy. The S&P 500 Index is on track for its worst 100-trading-day start to the year since 1970, according to Dow Jones Market Data. And for the Nasdaq 100, it’s about to be the worst ever.

The list of companies that have already moved to cut hiring includes Facebook’s parent company, Meta FB.,
Twitter Inc. TWTR,
and Uber Technologies Inc. UBER,
chip maker Nvidia NVDA,
and Salesforce Inc. CRM.
Meanwhile, streaming giant Netflix Inc. NFLX,
CVNA Caravan,
and PayPal Holdings Inc. PYPL
They have cut jobs.

“The impact of the financial markets, in many ways, contributed to the overheating of the economy and rising prices,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, which manages more than $33 billion of Horsham , Pennsylvania. asset prices will work in the opposite way: the evaporation effect of wealth and the psychological impact of what the markets tell people can tend to skyrocket.

“Growth slowdown is almost certainly on the cards and the steeper the drop in asset prices, the greater the chances of a recession happening sooner rather than later,” he said by phone. It was a dynamic that was also seen in the 2008 financial crisis, which emerged from a “confluence of events, but part of the equation had to do with a complete evaporation of liquidity in the markets and a huge bear market in equities.” .

US data released on Tuesday showed new home sales slumped in April and businesses expanded at the slowest pace in months. However, other recent data suggested the US consumer is still in good health, with strong retail sales last month, but optimism was quickly quenched by profit losses from retailers such as Target Corp. TGT.

The US economy shrank 1.4% during the first quarter, a contraction attributed to a record US international trade deficit, after a 6.9% rise in GDP in the last three months of 2021. The National Bureau of Economic Research defines a recession as a decline in activity that lasts more than a few months, which can make it difficult to see when it has already begun.

“The previous thinking in the markets had been that inflation and the Fed’s fight to end it would be what would lead us into a recession,” said Rob Daly, director of fixed income at Glenmede Investment Management in Philadelphia, which oversees some 4,500 million dollars in fixed income. assets. “But it is the revision of prices in the markets now that could lead us into a recession by slowing growth. Those chances are definitely increasing probably every day.”

Although he sees a slowdown in US growth morphing into the potential for a “mild recession” in late 2023, Daly said “the fear is that it could sneak in our doors faster.” I don’t want it to sound like I’m endorsing a recession, but there are certainly a lot of things that can cause the economy to slow down.”

The list of downside risks plaguing financial markets and the economy includes: Inflation hits its highest level in four decades, Federal Reserve interest rate hike looming, Russia’s war in Ukraine, supply chain disruptions, China’s COVID-19 lockdowns, and the resurgence of more coronavirus cases in the United States.

Earlier this year, investors were grappling with valuation issues when the Fed began raising interest rates from near zero, leading to a correction in asset prices, according to Glenmede’s Daly.

Now, the market is “starting to see the potential that inflation won’t be brought under control as quickly as we’d hoped, and that maneuvering by central banks, not just the Fed, is going to squash growth, which could push us down. faster than we expect.” we thought,” Daly said by phone. “The bond market is pricing in this lower growth scenario and taking some of its signals from the stock market, without necessarily signaling what it thinks about how much the Fed will raise rates.”

Read: “Markets are imploding” because the Fed isn’t doing its job, says billionaire investor Bill Ackman

On Tuesday, an aggressive rally in bonds pushed the 2- BX:TMUBMUSD02Y
and 10-year Treasury yields BX:TMUBMUSD10Y
to their lowest levels in more than a month. For its part, the Nasdaq Composite Index COMP
fell 2.4%, or more than the S&P 500 SPX,
and Dow Industrials DJIA
made a profit.

With many investors positioned for brighter economic growth prospects for so long, the reversal of those trades at the same time is creating more market pain. Funds invested in long/short equity strategies around the world are all in the red this year, according to a performance review compiled by HSBC’s alternative investment group.

The group of hedge fund managers known as the Tiger Cubs, who focused on tech stocks, is being beaten. And Melvin Capital, which bathed in GameStop stock and memes and was forced to sell off, was seen as a possible reason for last Wednesday’s stock sell-off that sent the Dow and S&P 500 to their worst daily declines in approximately two years.

“The economy is slowing down and it’s probably slowing down quite dramatically,” said Gregory Faranello, head of US rates at broker-dealer AmeriVet Securities in New York.

“Could we be diving into a recession faster than people expected? The answer is yes, but we are going to need more time to see the data,” she said. “Not that we’re supporting that, but we’ve had a very drastic price revision across the board in a short period of time, and that’s going to hit the economy. We are starting to see signs of that.”

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