Traders surrender to recession paranoia in U.S. market rout

When it’s just the yield curve narrowing, or oil jumping, or stocks falling into a correction, maybe you can hold off on panicking over a recession. When all three happen at once, the argument gets stronger that it’s time to take the threat seriously.

When it’s just the yield curve narrowing, or oil jumping, or stocks falling into a correction, maybe you can hold off on panicking over a recession. 

When all three happen at once, the argument gets stronger that it’s time to take the threat seriously. 

That’s the case now, when a concerted move in the direction of nervousness on the part of stocks, bonds and commodities is forcing traders into a real-time reassessment of their expectations for growth. 

Such concern may seem misplaced when the U.S. economy just generated 678,000 jobs in a single month, and few observers see a downturn in the immediate future. At the same time, markets are relentlessly forward-looking, and their common message is getting harder to overlook. The S&P 500 sank almost 3 per cent Monday and oil approached the highest price in a decade, while nickel and wheat were the latest materials to surge. Taken together, the message now suggests the threat of an economic retrenchment has increased amid war in Europe and a staunchly hawkish Federal Reserve.

“Prospects for growth have to be marked down and that risk of recession has to be marked up,” David Donabedian, chief investment officer of CIBC Private Wealth Management, said by phone. “If oil goes to US$125 or higher and stays there for six months, you’re going to have a recession in Europe just because of their ultra-high sensitivity to Russian imports.”