Have markets got it right?
That is the question dominating the attention of executives on Wall Street and in corporate America right now.
Financial markets seem to be bracing for a global recession. One example of this in action is the bond market, which has “recessionary” fund flows as investors shift their money out of high-yield funds and into government bonds.
The economic fundamentals, however, do not signal a recession with such certainty, as my colleague Myles Udland has pointed out.
And it is this mismatch which dominated the conversation this past week at the World Economic Forum at Davos.
“There seems to be a disconnect in to where the market is and where actually what people are seeing on the ground in their businesses,” United States Commerce Secretary Penny Pritzker told CNBC in an interview.
“I can’t tell if the markets have some knowledge that the rest of us don’t have, but when you talk to business leaders and then you talk to them about their US business, it’s looking pretty good,” she said.
To recap, markets have been going haywire since the turn of the year. The S&P500 has fallen around 7% from December 31, and the Dow Jones Industrial Average is down around 8% from December 31, but those numbers don’t tell the full story.
Stocks, bonds and oil have all jumped around. The VIX, a measure of equity market volatility, hit a high of 31.36 earlier this week, up from around 18 at the very end of 2015.
“What has happened in the market in the last three weeks is a bit breathtaking I have to say. I’ve not seen anything quite like this,” Meg Whitman, chief executive at HP Enterprise, told CNBC in an interview.
The question is: do those market moves indicate a forthcoming recession?
According to JPMorgan strategist Jan Loeys, US stocks fall on average 30% from their cycle peak in a recession, putting the recession-level S&P500 at 1,500. If there is no recession, stocks should hit 2,200, he said.
On Friday, the S&P500 closed at 1900, suggesting the equity market is pricing in a 40% chance of a recession. The corporate bond market is pricing in a more than 75% chance of a recession, according to Loeys.
According to Loey and others, the market is most likely over-reacting.
“We view what’s going on really as probably a more a re-pricing of markets than any big fundamental shift” Citigroup chief executive Michael Corbat told CNBC.
James Gorman, chief executive at Morgan Stanley, is in the same camp, saying he didn’t understand why there had been “this kind of violence” in the market.
Now there is an argument that this “violence” could induce a slowdown, or at least redundancies. Larry Fink, CEO of BlackRock, said in mid-January that the market volatility had the potential to lead to layoffs through the first half of the year. Henry Blodget, chief executive at Business Insider, wrote Thursday that he had overheard a billionaire saying the same thing.
Still, the consensus seems to be that this is a short-lived shake-out, and that markets will settle down soon enough.
“When markets are this bad, it’s reasonable to say it might be telling you something, but also reasonable to say maybe it’s not. Someone says markets have forecasted nine of the last five recessions,” JPMorgan CEO Jamie Dimon told CNBC.
The US economy is growing and adding jobs, he said, with household formation and car sales up. China is growing, and Europe will grow a little too.
“It will be worse than we thought, but I’m hopeful that this is all a big adjustment and in a couple weeks we’ll take a deep breath and say thank god that’s over.”