Increased Recession Fears Expected to Drive S&P 500 This Week
03 Julho 2022 - 2:07PM
Finscreener.org
Investors have been increasingly
concerned regarding a potential recession in the fiscal third
quarter, after a worse-than-expected economic contraction in the
first quarter and expected deceleration in jobs
growth.
The Bureau for Economic Analysis
(BEA) released its third fiscal 2022 first-quarter GDP estimate
earlier this week, indicating a worse-than-expected contraction of
the U.S. economy.
The new economic data states that
the US economy shrunk by 1.6% on an annualized basis in the first
three months, down from the initial 1.4% contraction reported in
the April 2022 estimate. In comparison, analysts expected the
quarterly GDP to improve by 1% on an annualized basis, as per Dow
Jones consensus estimates.
The third GDP revision has
deterred investors substantially, stoking recession fears.
Typically, a GDP decline in two consecutive quarters indicates a
recession. As the Fed reiterates its aggressive hawkish stance with
a potential 75 basis point rate hike this month, recession fears
have catapulted in the second half of the year.
Bearish investor sentiment has
already dragged stock market indices lower in 2022. The S&P
500 (AMEX:
SPY) index is down 20% in
2022. Comparatively, the NASDAQ Composite index and
Dow Jones Industrial Average index have fallen 30% and 15% year to
date.
Decelerating job growth
One of the most significant
indicators of recession is decelerating job growth. Investors are
currently eyeing the monthly jobs report for June, which is
scheduled to be released this Friday, July 8th.
The Dow Jones consensus estimate
of 250,000 non-farm payrolls reflects a steep decline from the
390,000 non-farm payrolls reported in May. Though the labor market
is expected to remain strong, economists are predicting a declining
employment growth rate due to the aggressive rate hikes and
quantitative tightening.
The employment component of the
ISM June manufacturing survey stood at 47.3, indicating economic
contraction.
Moreover, the head of
macro-economic research at AXA Investment Managers, David Page,
expects non-farm payrolls to be in the range of 150,000-250,000 by
the early third quarter.
Regarding this, he said, “That’s
part of a trend we’re seeing emerge. It’s very evidently a slowdown
in the economy … The warning signs are starting to emerge, and the
more we see those warning signs start to trickle into the labor
market, the more the Federal Reserve is going to have to take heed
and that’s what puts such focus on next Friday’s payroll
report.”
Rate hikes might drive S&P 500 lower
The Federal Reserve increased the
benchmark federal funds rate by 75 basis points earlier in June,
the largest hike since 1994. Economists had earlier polled another
75-basis point rate hike in July, as the inflation remains high.
However, the latest GDP data released by the BEA indicates an
economic contraction.
If the employment data scheduled
to be released this Friday points toward a potential recession, the
Fed might reconsider its 75-basis point rate hike expected in July.
Page expects the Fed to rethink a 75-basis point hike in its policy
meeting in July.
If there are credible signs that
the economy is slowing down, then Powell might end up raising the
federal funds by only 50 basis points. This would increase the
chances of a “soft landing.”
On the other hand, if the
employment data is strong, the Fed might be required to double down
on its rate hike policy.
Rising interest rates have
already driven growth stocks significantly lower in 2022 as it is
expected to result in lower profit margins and earnings per
share.
The BEA had initially estimated
the United States to have contracted by 1.4% in the fiscal 2022
first quarter, which was then revised twice to indicate a 1.6%
decline. This, coupled with lower consumer spending and surging
inflation, has caused recession fears to skyrocket. The Atlanta Fed
GDP tracker indicates the US is already in recession, as the GDP is
expected to decline 2.1% in the second quarter.
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