Is A US Recession Coming & Have Stocks Peaked

Welcome back to the trading floor, and I've been away. So I went away on holiday last week, came back into the office on Monday. We've got a whole new group of very up-for-it young individuals who are starting our Sum Analyst training program, and it kicked off with you, Piers, our co-founder. Bit of an opening, you know, speech, and within that speech I saw that one of the students asked you about, what do you think about— what's your view about US recession? And you just outright said, I think the S&P has topped. I think we're going lower. I think recession's coming. And I was like, what have I missed since I've been away? Because you are a half glass full kind of guy, so something pretty dramatic must have happened in my absence. And this episode is all about me probing you on what on earth is going on.

Well, look, it was Monday morning, all right, when I, when I said that, and maybe I got out of the bed the wrong side. But yeah, no, no, I, it's a, it's a punchy comment. I'm looking at the S&P 500 chart right now I look, we've talked about in the last few weeks about the big sell-off and the big kind of mini panic, um, and it's pretty much all rebounded. So just to put some numbers on it, the current high of the year, and I probably foolishly said yesterday I think that will be the high of the whole year, the current high of the years for the S&P is about, let's call it 5,660. Let's just round it, okay. We're current— and we sold off in a straight line down to 5,160. So 500 points, nearly 10%, all right. And that took place between July 16th, that was the top, and the bottom of that sell-off was August 5th, okay. Big wobble. We talked about, you know, the yen carry trade. We talked about the trigger being a a really weak non-farm payrolls report, recession risk started to ramp higher, and people started to worry that the Fed have got it— they're too late. You know, we're obviously wanting and expecting, and we will get a rate cut from the Fed on their next meeting mid-September. But all of a sudden there was a panic. Oh my God, have the Fed left it too late to start cutting? Hang on, are we going to get a recession? Look at the jobs report, it's really bad. And a big wobble, and then the yen carry trade unwound, and Japanese stocks sold off like 15%, and it all— there was a— it's just that microcosm of panic, and the market was down 10%. 5th of August hit the low. Here we are now. We're recording this on the 19th of August, and we're back up at 5,600. So we've all— not quite, but almost reclaimed the entire sell-off, right? So yesterday I quite— maybe I'll probably end up looking pretty stupid for saying this, but I said that that July, mid-July high will be the high of the year. So what I'm trying to say is this rally, the rebound's over, baby, is what I'm predicting, which could be a very foolish prediction. I'm going to say that line many times here. But yeah, look, I think that the mood has shifted.

Yeah, I'm waiting for Powell to stop you out of your trade this Friday.

Well, no, I think the mood has shifted. Let's step back a sec. That big sell-off, um, I think has drawn a line in the sand, quite a major one, as to what markets, economists, central bankers are primarily focused on when it comes to trying to figure out where's the economy at, and therefore, right, what should we be buying and selling as traders, and therefore where are markets at. And I think we've spent 3 years obsessed with inflation, and I think that sell-off mid-July has drawn the line. We're no longer obsessed with inflation, we are now obsessed with the US labor market and what's the situation going on there. And then, so we are now Basically, all we care about is news on the US jobs market. And are we seeing a weakening there? Yes. So how quickly is that weakness accelerating, and will it get to the point where actually it becomes a real problem where we get a US recession? And so Will there be a recession? When will it be? How large will it be? Have the Fed left it too late to cut rates or not? Can they catch up by cutting more quickly? You know, these are all now the questions that people are obsessed with and will be obsessed with for the rest of the year. Okay, so take inflation off the top of your agenda list and replace it with the US labor market. So on that front, And there's the problem with the US labor market. There's so many different ways of measuring it, so many different data points, um, non-farm payrolls being one of them, and one of those kind of key sort of monthly headline figures. So that always gets reported on the first Friday of each month. So the September payrolls report, which will be tracking jobs in August, right? So August as a month finishes And then the US Labor Department, they crunch all the numbers and the data, and then they report the number of jobs that were created in the month that's just finished of August. So they'll tell us that on the first Friday in September. Key thing there is that's before the Fed meeting. The Fed meeting's mid-September, so we will get another US labor market report. Now, the July data that was announced on the first Friday in August, which triggered this big or helped to kind of accelerate that sell-off to the downside that I spoke about, came in really weak. So the figure was 114,000 jobs were created in the month of July, which was a lot lower than was expected and lower than really we've seen. And actually April got revised down, actually. So actually April was 108,000. So at least we have had one figure that's weaker than that. But, but if you take out the April one, that's basically the lowest reading we've had for a couple of years, right? So people are starting to say, oh dear.

So is there going to be— on that data point alone, we'll talk about the kind of event roadmap that could shape sentiment going forward. But with that data point you just mentioned, then the one that will come, the next labor report, given it was such a big catalyst before, It's going to be super important in a few weeks' time. Is there a sweet spot then where that number comes in at, let's say, 170 or 175? It kind of reverts back to that kind of degree of stability in May, June. It allows the Fed to cut to an extent of multiple cuts, whether that's 2, more likely possibly 3. But it kind of allows them the cut narrative to remain, but enough that the recession risk is, is done, and then we rally again, we punch higher, leg higher. Or is there a case of then— so you can kind of draw it out now, the scenarios. You've got like the 170 to 180 kind of sweet spot. If it starts to go north of say 250, it's almost a problem. If it starts to go south of, um, 100, there's a problem.

So you've got— look, we've, we've, um, traded and reported on this figure for, well, over— well, my case, over 20 years, and it's every month, right? So we've done it, we've seen a lot of these, and what you're saying is bang on in that there's basically 3 scenarios. For that figure that's going to be announced on the start of September. There's: it's way stronger than expected, it's kind of in line to slightly better, or it's weaker than expected. Okay, so there are your three. The problem that stock markets have— two of those three are really bad news and one's mildly positive. So the mildly positive one first. How am I going to be wrong on my S&P prediction? How can the S&P break to a new high and continue to march higher, you know, through into the end of August and into September? There's only one way, and that is if we continue to get data that shows the recession risk is, is small and minor. Now, we've already had a couple of items on the list that have helped to— this rebound we've had has been super strong. How has that happened? It's because we've had some good news on that whole recession thing, and it came in 3 different flavors. One was the retail sales report. So this was announced out of the US last week. So this is looking at how much are consumers spending, which is a key part of the economy. About 75% of GDP is consumption. Right, so consumer spending is absolutely critical. The retail sales report announced last week was way better than expected. Actually came in at 1% growth, um, in the month of June— uh, sorry, the month of July compared to consumer spending in the month of June, right? So 1% up. Forecasts had only been for +0.3%. It was actually the biggest monthly increase since January 2023. It was like an 18-month beat. And it was all the more surprising given we'd had the really bad nonfarm payrolls report the week before. And it was like, whoa, hang on a minute. I think we've over-panicked here on this recession thing. Right, let's buy stocks again. That got added to by Walmart's earnings coming in really strong. Walmart are saying, no recession here. Not on the evidence of our kind of same-store sales figures. And they were pretty confident. And then finally, one of the labor market measurements is looking at jobless claims. So those— the number of people each week, the new people coming in to claim jobless benefit for the first time. And that actually turned out to be lower, which is better than expected. So we kind of had a trio of figures that really killed the panic and said, look, don't worry, And actually, the Goldman Sachs recession indicator is probably a good measure of all of that and sums it all up. Because mid-July, Goldman Sachs had their, uh, recession prediction at a just a 15% chance of a recession. Okay, then all the panic ensued, bad non-farm payrolls, yen carry trade blew up, and they moved their recession expectations to 25% likely. Then the retail sales figures came out, Walmart, jobless claims, and they revised it back down, and their recession prediction went to 20%. So their recession prediction model has been yo-yoing all over the place, as have markets. Um, so that's— now we draw a line there, that's done. So now it's about, well, what, what information is ahead of us, and which camp are right? You know, are recession risks increasing Or actually, are they not? Should the Fed cut? By how much? And so on. So we're kind of now looking forwards. And yeah, we've got a big meeting— well, big event this Friday to hear from the Fed, right?

Yeah. So before we talk about the kind of Jackson Hole speech and some of the other key things on the near horizon that can shape this sentiment going forward and thus the direction Just wanted to get your thoughts on a few comments out of Goldman's again, but this time out of their equity desk, because up until Tuesday, um, we had had 8 straight days of gains in the S&P, and that's the longest streak since November. Now there's a couple of points of terminology here. It'd be great that you could deconstruct so that everyone can kind of understand what Goldman's are actually saying here. So it's kind of 3, 3 legs to it. The first is momentum traders and corporate buybacks. So how is that a positive in terms of this recovery that we've seen on those two plays?

So momentum trading, this is a big part of our market system these days because of the big hedge funds running algorithmic trading strategies that are momentum. That means like trend following strategies, right? And so if there's a trend in place, then it's almost like self-sustaining because the more there's an uptrend, well then the more these algo models get triggered to buy, which means the uptrend continues, and then more algos buy, and it's this kind of self— you know, this, this positive feedback loop that kind of drives it higher, right? Because of the sharpness of the rebound we've seen over the last 2 weeks. You said 8 straight days up in a row. You know, that's enough for these momentum trading algos to start going, right, there's an uptrend, let's buy. And it kind of self-fulfills that scenario. That's number 1. Then you mentioned share buybacks. I mean, I don't know about that. Share buybacks are happening all the time. If you look at certainly the big tech companies, right, and they set these out at the start of the year, they've got disgusting amounts of cash, they've got no idea what to do with it all. So one big part is they buy back their own stock. We're talking tens of billions of dollars worth of buybacks, and this happens throughout the whole year. So I don't know whether Goldman's can say, oh, well, share buybacks, that's going to push the market up. Well, they were buying back shares in the second half of July when the market was going down, you know. So I think, fine, that— I think that's a consistent positive thing in the market. And it's not like that now, here we are, second half of August, all of a sudden share buybacks are going to pick up. I don't know about that. So I, I, I discount that as an idea.

Personally, a bit of context on the kind of trend-following systematic funds, that the kind of volume that Goldman's were talking about was that such funds were back to re-leveraging after they cut their total long exposure from $450 billion in July to $250 billion currently. And they were saying that that flow, or the fund's demand, will have a larger impact they re-enter the market when adjusted for August's lower liquidity, which might explain some of the nature of the exacerbation, if you like, of the move on the, on the bounce that we've had. One other thing as well is that looking at the performance— and I don't know this, I just recall it from listening to another podcast about looking at the S&P ex-MAG7— and actually that performance has been pretty decent. When compared to, say, in the context of the recent movement we've had in big tech. Does that not give you some comfort?

Uh, it, it does. I mean, from that recession risk point of view, yes. So you're basically saying if the Mag 7 have underperformed, then actually it's really more about profit taking from a phenomenal rally. And if the rest of the S&P that have been underperforming for like 12 months. If they're actually performing better, that doesn't tell you there's a recession coming. Um, but look, I would say that there's an important word here, it's volatility. Volatility has now stepped higher, and I think the level of volatility will now remain more elevated than it was pre the sell-off mid-July. I think we're now into a second half of the year, uh, from the volatility point of view. So I think we're going to have a more volatile second half of the year, which means these funds are going to be in and out of trades more quickly. Which is why, yeah, fine, leveraged positions have been put back on. They have. Doesn't mean they can't be taken off super quickly again. If we get a piece of bad news. And maybe back to my non-farm payrolls thing, I was saying that there's 3 outcomes, 2 of which are bad news. Um, so if the, if the non-farm pay— the least likely scenario is the non-farm payrolls number will be much stronger than expected. Now that, believe it or not, will be bad news for stocks because stocks are pricing in rate cuts from the Fed they're actually pricing in a full 1% worth of rate cuts between now and the end of the year. I'll come back to that point. I don't think that's going to happen, which is one of my key reasons why I think the S&P's reached its top. I'll come back to that. But so stronger than expected means no— less rate cuts. And if we price out some of those cuts, that's bad news for stocks. Easily the biggest negative scenario for the stock market will actually be if the number's really bad. The worst possible cocktail for the stock market is bad economic data with the expectation that the central bank will not do enough to support it. So if you've got bad news and the Fed aren't going to do enough, that's super bad. That's, that's like your double negative, and stocks will come off sharply.

However, I would go a step further and say I agree with what you're saying, and when that market goes down, I'd be buying the dip. And the reason why is because if the Fed are too late, the Fed don't have a choice. The system can't get to a point of freefall or a systemic issue that could be more catastrophic. And so, so what if they're too late? Let it sell off. That's just a better entry point then for the prevailing directional long over the long term, because the Fed always at the backstop.

This Powell Fed— well, look, here's a quote from Mary Daly. So she's San Francisco Fed President. She's a voting member. On the FOMC. Here's what she said in the— quoted by the FT, she said, gradualism is not weak, it's not slow, it's not behind, it's just prudent. So she's saying, markets, you go and panic and do whatever you want, but look, we're a steady hand on the rudder, we're going to start cutting But we're going to cut 25 basis points per meeting unless something phenomenal happens out of the left field. But look, my prediction— I mean, what do I know? But this is my thesis. I think the Fed will cut 25 basis points at each meeting for the rest of the year. The problem with that for markets, there's only 3 more meetings: September, mid-September, So let's be clear, specific: 18th of September, 7th of November, 18th of December. There's 3 more meetings. If they cut 3 times by 25 basis points, that's only 0.75%. Markets want 1%. I think markets will be disappointed by the speed at which the Fed start their cutting cycle. Now, if you get even a hint of a slightly bad payrolls report at the start of September and the Fed at Jackson Hole on Friday talk down the idea of 4 rate cuts this year, then I think you've got a little bit of that recipe I'm talking about. You've got bad news with the idea the Fed aren't gonna speed up rate cuts just because the market's selling off, and I think that could feed into So I'm a selling— I'm selling spikes, I'm not buying dips.

I thought you like picking bottoms.

Yeah, I got smelly fingers.

So let's just look at this from a chronological order then. So next up is Jackson Hole, and just to briefly explain, on Friday And Jackson Hole being, um, a historic platform of where the Fed chair gets to give the market an insight into the latest thinking at the Federal Reserve outside of its uniform 8-meeting-per-year structure. So it's a very well-followed, has the potential to move markets. But if I'm interpreting what you're saying correctly, then are you assuming he really can't say a lot because the information's to come. So this is a bit more of a don't cause any great shakes, don't really change the communication strategy at this point. It's easy as she goes kind of situation. And the speech on Friday is not a big deal.

He won't change his messaging. Now, I think some market participants would like him to. They want him to be saying You know, we are very vigilant on payrolls and the unemployment rate. Yes, and we'll talk about the unemployment rate. Yes, it's talk, it's moving higher. And they want him to say, you know, if that, if that unemployment rate continues to move up at the rate it has been, then we will accelerate our rate cuts. That's what they want. Some people want him to say that. There's no way he's going to say that. So he will just toe the line, same messaging. And I think there'll be a certain portion of the market that will be unsettled by that.

Okay. So, yeah, so he's a— not to say non-event. Never say never. Yeah, but let's say it should be fairly smooth affair. And then that leads into next week. So this is pre-payrolls. So that's the week after. So next week though, you get Nvidia earnings actually on Thursday. And large-cap enterprise software, specifically GenAI Semiconductors, will be reporting. And this has obviously been a key theme throughout the entire year. NVIDIA have kind of managed to vault over what are exceptionally high expectations pretty much on every, every twist and turn. So is that also going to be equally quite key into this cocktail that you mentioned of whether or not there's sustainability and any further upside.

Absolutely. Yeah, it's going to be really important. Um, you know, we talked about this volatility. I mean, NVIDIA is probably right up there as one of the biggest movers here. If you take their all-time high, they've actually— there's a bit of a double top at around $136. So mid-June they hit $136, pulled back a little bit, rallied again, hit $136 again mid-July. Then it sold off sharply. And actually, the S&P sold off not quite 10%, um, Nvidia sold off 30-plus percent. So they went from $136 down to just snuck below $100, $99 low, right? They've now rebounded all the way back to $130. So I mean, volatility is crazy. So, but yes, Nvidia's news next week's key.

Look, you—

there's some insight here because you go about who are their biggest customers. Well, it's obviously the big tech firms like Meta and, and, and so on, and Apple and Google and whatever. And they've been saying in their earnings report— and Microsoft— they've been saying in their earnings report that their CapEx is continuing at the very high rate it has been for the last 12 months as they build out their compute power. So from that evidence, it would suggest that demand for NVIDIA H100 chips is still really strong. So I'd expect the news to be pretty good from NVIDIA next week. Um, I think for NVIDIA to break and make new highs, it can't just be good. The news needs to be exceptionally strong. So I'd say if news is good or in line, dare I say, if NVIDIA start to throw some water on— expect to dampen expectations. Well, that right there, it is definitely easily a strong enough catalyst to trigger a broad-based sell-off, but I wouldn't expect that. I think their, their numbers will be solid next week.

Okay, and then the final one that I was gonna say, because when we talk about, uh, year, year-end highs and levels and has it topped for the year The other big major event is a political one, which we've seen lots of changes obviously with Biden out, Harris in. And actually this week Harris in the polls has been polling ahead of Trump. Um, a couple of things I have seen though, which is I think if you're quite new to following that type of political information in connection to markets, it's quite easy to be drawn into thinking Oh, Harris wins and Harris stands for this, and therefore that's what will happen. Whereas the power is Congress and this kind of pyramid of power between who is the president and then who controls the House and the Senate. And it's that that looks in the polling, when you break it down another layer, that hasn't really changed a great deal. Because if Harris does win in then it's the most likely scenario of a divided Congress.

Right.

And therefore we have to take into consideration of how likely it is that changes actually occur. But the one I guess that stood out this week was talk about the corporation tax, because I think it was the Democratic convention and she's been a little bit criticized on the economic policies specifically. And one was about corporation tax, which I guess is quite a division between Trump's idea of kind of tax cuts from his previous legacy, as well as they want to put tax rates up on corporate. So how do you kind of read that?

Yeah, I mean, on the face of it, given that— that now we're hearing a bit more from her about, well, where does she stand, what are her policies, and we've heard very little on that. So it's good that we're starting to get some info. Where it looks like she's going with her economic ideas, it would seemed that she would be more of a negative for markets and share prices than Trump would. Trump's lower taxes, deregulation. Looks like Harris is higher taxes, right? So from that kind of just binary sense, you would say that it looks like she would be more negative for stocks than Trump. But check out the stock market. It's rebounded sharply. So it's not like stocks are reacting negatively at this point to Harris's idea of putting up corporation tax. And I think that's just because, you know, the election— I mean, I guess I was going to say it's still a long way off. It's actually not really, is it? But, um, but as you said, your point's the key one. It's actually fine. She might want to put corporation tax up to 28%, but actually, can she? And the answer to that is probably no. If, you know, the Republicans, you know, they're going to vote that down in Congress and it won't get through. So I think probably that's why you haven't seen the negative reaction in stocks off the back of this.

Okay, all right, to conclude then, I think what we've explained hopefully helps for the finance enthusiasts who want to know and be able to talk about markets, particularly for the students going into application season. Um, do feel free to drop us any comments on the pod on Spotify and we can reply there. However, just wanted to ask, we do also have business owners and entrepreneurs that listen to the pod. We have other people who kind of a bit more active in managing their pension and things like that. What's your word of advice there for those sorts of people in terms of reading this economic climate, particularly when you're getting lots of noise and you said volatility is going to pick up. That probably means financial media are going to love that and start really pumping that, that, that kind of finance information starts to creep up onto the front pages. The higher volatility goes. As a business owner, how do you manage that in terms of your decision-making process?

Um, well, as a business owner, I mean, it's a hard question to, to answer. Obviously businesses are very nuanced and different. And, you know, we're personally, we're quite confident about our pathway forward. So we're quite, even though there's risks and uncertainty, you know, we're continuing to invest in our future growth, right? I mean, you, it depends if you need financing, the then that's a concern for the pathway ahead, I would say, even though interest rates are coming down now, which therefore means, well, doesn't that mean financing is cheaper? But then if we, if we do get this negative outcome, and we might not, but if we do get a US recession, for example, then it might just be that, you know, a lot of the funding that's available out there might be less available. And so from a kind of funding point of view for businesses, it might become that, you know, credit might become a bit more scarcer. If you can get it, it might be cheaper though, because rates are going down. Um, it's just whether you can get it or not. Um, so that's what I would say from a kind of business owner's point of view. Um, then like if you're running your pension And, you know, if you've got a SIP and you're thinking about your investments, I mean, as volatility is up, that's because uncertainty has gone up and we're not quite sure, right? And I think, you know, the prudent thing to do if uncertainty is higher is just to de-risk a little bit. I mean, look at Warren Buffett. I mean, he kind of knows what he's doing, right? He's got his biggest cash position for that he's had for many years right now, which I think is a reflection of that. It's just that, right, yes, rate cut— cutting cycle's coming, but is the economy deteriorating faster than we thought? The rate cuts coming too late? Those uncertainties are creating this volatility, and that's where you can get really sharp moves in markets which can become fantastically uncomfortable. So, you know, if it's on the downside, of course. And so perhaps de-risking a little bit at this point can just help you sort of, um, stay sane through what might be a more intense roller coaster ride for the next 6 months.

Cool. All right, we will wrap up the show there. Thank you very much, Piers. Let's see how things pan out by the next recording next week. I am fingers crossed we literally get— what did you say it was? 56, 60. Yeah, I'm hoping for, um, yeah, 50, 56, 65 is all, all I asked the Lord for, basically.

I mean, it could be the worst prediction in history and that I could be already proven wrong by the next podcast. So, well, yeah, let's see.

All right. Thanks very much, Pierce. Thanks everyone for listening. Take care.

Catch you later.