Market risks come in three flavors: recession risk, economic shock risk, and risks within the market itself. So, what do these risks look like for August? Let’s take a closer look at the numbers.
Recession Risk
Recessions are strongly associated with market drawdowns. Indeed, 8 of 10 bear markets have occurred during recessions. As I discussed in this month’s Economic Risk Factor Update, right now the conditions that historically have signaled a potential recession are not in place. Yes, some of the data is softening, and trends may be changing. But on an absolute basis, conditions remain good—with healthy job growth, high levels of consumer confidence, and expansionary business confidence. As such, economic factors remain at a green light.
Economic Shock Risk
There are two major systemic factors—the price of oil and the price of money (better known as interest rates)—that drive the economy and the financial markets, and they have a proven ability to derail them. Both have been causal factors in previous bear markets and warrant close attention.
The price of oil. Typically, oil prices cause disruption when they spike. This is a warning sign of both a recession and a bear market.
A quick price spike like we saw in 2017 (it did not appear to reach a problem level and was short lived) is not necessarily an indicator of trouble. The subsequent decline also took this indicator well out of the trouble zone. Prices have started to rise again and are approaching a level where we should be concerned. Just as in 2017, while the risks from this measure are rising, they are not yet material or immediate. Therefore, the indicator remains at a green light, although we are getting closer to a high-risk level.
Signal: Green light
The price of money. I cover interest rates in the economic update, but they warrant a look here as well.