Meanwhile, the latest Bank of America Global Fund Manager Survey revealed that only 11% of manager surveyed thought we were heading for a hard landing, as opposed to 68% expecting a soft landing and 18% expecting no real downturn at all. Nerves were calm and the market sentiment was strong – at least until the very end of the month.
I’m writing this a few days into August, when things suddenly look a lot different. Markets have been falling globally, triggered by a Japanese interest rate increase that put an end to a seemingly riskless carry trade, while US unemployment figures rose and nonfarm payroll numbers came in at a disappointing 114,000 new jobs, far below the expected figure of 170,000. Volatility spiked, as did the VIX index. And the spectre of recession suddenly stepped out of the shadows.
At this point, I’d be daft to detail more of July’s events. That’s history now, easily forgotten. I also believe, however, that a forecast of sorts would be equally foolish. What we do know is that economic and financial fundamentals don’t look that bad, certainly not to the point of heralding a recession. Current growth is strong, the yield curve has been inverted for too long to represent a meaningful indicator, and the Fed, while obviously having had a similar opinion on the economy, now looks a lot more likely to cut rates faster and by more than expected just a few days ago.
We also know, however, that market turbulence in itself may induce or help trigger a recession, through consumers feeling poorer or investments being put on hold. Fundamentals may be strong, but consumers, investors, and business managers are notably more fickle.
The situation is probably best summed up by what former US president Franklin D. Roosevelt said in his inaugural address in 1933: “The only thing we have to fear is fear itself.”
If you do feel smitten with fear, that’s fine by me. That’s how the rest of us make more money.
Finn Øystein Bergh
Chief Economist & Strategist
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