From Calm to Panic: Fears of a Recession Loom



Russ Koesterich explains why fears of an imminent US recession may be overblown.

The last few days have reminded everyone how quickly markets can turn. In the space of barely a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.

There was no single catalyst for the recent selloff, but an underlying investor concern is whether the slowdown in China and other emerging markets will drag the United States into a recession. While I haven’t been overly bullish on US growth, I believe this fear is overblown.

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Market Realist – What shook the markets last week?

The graph above shows the volatility index, or VIX (VXX)(VIXY), which is known as a fear gauge for stocks. After remaining calm for most of 2014 and 2015, American stocks saw a sudden spike in volatility last week. It was triggered by the devaluation of the Chinese yuan due to a variety of reasons.

Investors started aggressively selling risky assets as fears of a slowdown in China (FXI) spooked Wall Street. Fears of a “new normal” in China had led to a drop in commodity prices over the past several weeks, which is a negative for commodity-exporting emerging markets like Russia and Brazil. Also, lower oil prices have adversely affected the earnings of the energy sector, which now makes up a much bigger chunk of the US economy compared to 2009. Finally, the possibility of an early rate hike by the Fed played on investors’ minds as well.

The S&P 500 Index (SPY) fell by ~2.0% on Monday, August 24, with global markets (ACWI) in a bloodbath. The S&P 500 index fell 6.3% in August 2015, which was its worst month since another 6.3% decline in May 2012.

In the rest of this series, we’ll explain why the US isn’t heading to a recession despite a slowdown in China and other emerging markets.

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