Stocks Flash Recession Warning as Trouble Spreads to Industrials
US small-cap and industrial stocks are dropping, typically signals of a recession, but in a year where equities have already beaten expectations some investors are dismissing the moves as little more than noise — for now.
The S&P 500 Industrials index peaked on Aug. 1 and is down about 8% since then, teetering on a correction after several major US carriers cut their profit outlooks for the third quarter on a sudden jump in oil prices. The small-cap Russell 2000 Index has lost more than 11% from its July 31 closing high, roughly twice the decline in the S&P 500 Index over the same time. Steep drops in small-cap and industrial stocks typically occur when the economy is in a recession.
There are other signs of trouble in the stock market. The S&P 500 Index is headed for its first quarterly loss in a year, just had its worst week since March 10, when Silicon Valley Bank collapsed, and has shed 2.8% since Wednesday, the day of the Federal Reserve’s policy announcement that featured the theme of “higher for longer” rates.
In response, investors are pulling money from equity funds globally at the fastest pace since December, Bank of America Corp. strategists say.
That said, there is hope for stocks. Earnings season is coming, which may matter more than rates for stock prices now according to a model from Bloomberg Intelligence. Companies are expected to post profit declines of just 1.1% in the third quarter, followed by gains for at least the next year, according to Bloomberg Intelligence data. Plus the Federal Reserve this week said it’s forecasting stronger economic growth than it expected just a few months ago.