Fear of recession triggers a long overdue correction, but markets recover from yesterday’s panic selloff

  Macro commentary by eToro analyst for Romania, Bogdan Maioreanu   Fear of recession after questionable economic data in the US combined with an unexpected hawkish decision of Bank of Japan sparked a selloff in the global financial markets on Monday. In fact, what happened might be the long overdue correction in the financial markets after sustained gains. And when fear is dominating the markets, some investors sell first and ask later why. But after the massive selloff the markets are already rebounding today as lower prices start to create buying opportunities, with investors now seeking to buy the dip.   Asian markets rebounded with Nikkei 225 rising 10% and US Index futures are also pointing up. Also, while losing almost 6% in the past week, the S&P 500 index is still up almost 9% from the beginning of the year. With strong earnings of the companies in the S&P 500 and still a strong US labour market despite the recent figures, there is still room for optimism in the markets. Inflation has been coming down and the US Federal Reserve has space to manoeuvre and cut interest rates faster to allow more oxygen to flow into starved sectors like industry and real estate to avert a recession. Investors should follow their investment plans as very often corrections are offering opportunities to invest in good stocks at better prices.   We have seen in the latest eToro Retail Investor Beat survey that when asked about external risks for their portfolios, 19% of the Romanian investors and 18% at global level are citing a possible recession in world economies. In the US, 21% of the individual investors see a local market recession as a significant risk for their portfolios, immediately after inflation seen by 30% of investors. As the US is the largest global economy by nominal GDP, these fears extended to the Asian and European markets, Romanian stock exchange included, triggering corrections.   However, it is still unclear if we are indeed witnessing the beginning of a recession or even a hard landing. The markets fear this at the moment and react nervously when individual reports, such as the US jobs report, point in the direction of an economic slowdown and investors try to anticipate how it would affect consumers and industry, with shares in the tech sector taking a tumble on Monday.   Looking back there have been eleven US recessions since the second World War. They last an average 10 months, peak to trough. They’ve been getting shorter as central banks got better at managing the economy, and it became more services-oriented and less cyclical. causes do vary from financial crisis and leverage (2007) to sector (2001 tech crash) or other issues, like pandemic (2020) or oil shock (1970’s). The driver of recession does matter. Those driven by financial crises or leverage, like 2007, tend to cause more damage and be longer lasting than those driven by other issues.   Most bear markets, or 20% index price falls, coincide with economic recessions. The GDP typically falls for two straight quarters, hurting metrics from employment to wage growth and retail sales. The average bear market lasts 19 months and falls 38%. The average bull market by contrast lasts nearly four times longer, is four times larger, and is usually built on the lower inflation and interest rates of the recession.Corrections are normal in the markets. In fact since 1928, 94% of the years had a 5% or worse drawdown and 64% of them had a 10% or worse correction.   Investors fear that the US Fed decision to postpone the first interest rate decrease may hurt the economy. But we have seen responses from Fed members reassuring that they have the tools necessary to avert this. Also, the decreases in stock prices of mega cap companies might have put an end to the pain trade and it is possible to see a technical rebound. In fact, according to the eToro Retail Investor Beat survey, 69% of global investors declared that they have cash in their portfolios. This means that they were stacking cash for possible corrections that might bring prices of fundamentally solid stocks to buy levels after the extended rally. And by the look of past couple of days events, correction is here creating opportunities.   *** Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.   About the poll The latest Retail Investor Beat was based on a survey of 10,000 retail investors across 12 countries and 3 continents. The following countries had 1,000 respondents: UK, US, Germany, France, Australia, Italy and Spain. The following countries had 600 respondents: Netherlands, Denmark, Poland, Romania, and the Czech Republic. The survey was conducted from 15 May - 5 June 2024 and carried out by research company Opinium. Retail investors were defined as self-directed or advised and had to hold at least one investment product including shares, bonds, funds, investment ISAs or equivalent. They did not need to be eToro users.