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While stocks (^DJI, ^IXIC, ^GSPC) are bouncing back after a three-day sell-off, Rosenberg Research founder and president David Rosenberg believes it is just a "brief countertrend" amid a larger sell-off. He joins Market Domination to lay out this case and whether the US economy is on the brink of a recession.
Rosenberg calls the movement "purely" algorithm trading and an oversized reaction to the sell-off in the days prior. He adds that the market "has become unhinged" over the last week as volatility has exploded. He notes that today's rebound is expected, saying, "You would get a technical bounce off the oversold levels that we had." However, he cautions against believing that the market is now out of the woods.
He adds that a recession "is not too far away," highlighting the weak jobs report in July that triggered a lot of the market action on Friday. "You're looking at the whole gamut of employment indicators. You look at nonfarm payrolls, you look at the household survey, you look at the JOLTS (Jobs Openings and Labor Turnover Survey), look at the jobless claims and what's happening to the backlog of continuing claims, and you could see that cracks are starting to emerge in the labor market," he explains.
Uh, while stocks are rebounding today, our first guest sees these gains as just a brief counter trend in response to yesterday's sell-off. For more on what the latest moves mean for investors, we want to welcome in David Rosenberg, Rosenberg Research founder and president. So, uh, David, we are bouncing today. Green all over my screen. You say, though, David, this is a brief counter trend trade. How come, David?
Well, a lot of this is just, uh, purely algo trading and, uh, a, uh, oversized, uh, reaction to the oversized negative reaction that we got in the past couple of days. The market has become unhinged, uh, in the past, not just the past few days, the past week, the volatility has been off the charts. And not just daily, but, uh, but hourly. So, you know, from my perspective, um, you know, you got the VIX hitting 60, uh, after, you know, a monumental decline over a couple of days, and you would expect that, you know, you would get a technical bounce off the oversold levels that we had, but to make anything over and beyond that, uh, I think is, um, not a wise thing to do. The market was starting to look wobbly even before what happened yesterday or Friday. And, you know, last I looked, nice bounce today, the Dow is still off nearly 2,000 points from the high. Nice bounce today, the S&P 500 is still down about 7% from the high. Uh, so there's a lot of technical damage that was done, and, um, technically we're reversing course right now, but this market is definitely not out of the woods.
Um, David, let's also talk about the backdrop for at least one of the reasons why the selloff has been occurring, and that's concerns about the economy. You probably just heard us saying that it seems as though the consensus is coalescing around the idea that the economy is slowing, but perhaps not into a recession. I have a feeling you're on the other side of that. So if we are either already in a recession or rapidly approaching one, what is sort of the, um, engine of that recession, if you will, or what is the engine that is sputtering in the US economy?
Well, you've got, uh, the housing market, uh, has turned down again. Uh, and even with the falloff in mortgage rates, the housing sector, uh, has, um, started to, uh, falter in a very significant way. So that's point number one, and housing, of course, is a quintessential leading indicator. On top of that, look at the information we got on Friday from the non-farm payrolls. We had flat, uh, factory employment, a big decline in hours worked, and in overtime that transcended, you know, what we were seeing, uh, out of the hurricane. So it looks like industrial production is starting to roll over again. Um, but the elephant in the room always and everywhere is employment, and, of course, that is a coincident lagging indicator. But, you know, I'm taking a look at 114,000, uh, non-farm payrolls. Of course, over half that number was the birth-death model, but in the context of the size of the labor force, that is basically insignificant. Uh, and the household survey employment is actually now running flat year of a year. So you're looking at the whole gamut of employment indicators, you look at non-farm payrolls, you look at the household survey, you look at the jolts, look at the jobless claims, and what's happening in the backlog of continuing claims. Uh, and you could see that cracks are starting to emerge in the labor market. And that's why the stock market was selling off on Friday, why the bond market was rallying on Friday. Then, of course, you know, we got hit with this, um, you know, reversion of the, uh, yen carry trade, and that was mostly yesterday's story. But Friday's story of cracks emerging in the labor market, uh, that hasn't gone away. Uh, and so the fact that we don't have any more fiscal stimulus, uh, that the household savings pile from the prior pandemic stimulus has run dry, and now, you know, you talk about a cooling in the labor market, but the household survey is actually flat year of a year. And in the past, going back to 1950, when you flatten out on the household survey, you're either heading into recession, already in one, or crawling out of one. So I still think that the recession is, um, you can argue that it's not here just yet, but I think that it's not too far away.
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"The fact that we don't have any more fiscal stimulus, that the household savings file from the prior pandemic stimulus has run dry, and now you talk about a cooling in the labor market, but the household survey is actually flat year over year. And in the past, going back to 1950, when you flatten out on the household survey, you're either heading into recession, already in one, or crawling out of one."
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This post was written by Melanie Riehl