According to Caixin Finance on September 9th (Editor Xiaoxiang), for Wall Street professionals who firmly believe that economic performance will not drag down the market, the current situation is becoming increasingly difficult.

The worrying data predicted by the bond and commodity markets have also woken up traders of risk assets from their 'dream' last week, as US stocks posted their worst performance since the 2023 regional bank crisis.

After rebounding from a brief slump since early August, stock market bulls seem to once again succumb to concerns about economic growth in the early part of this month, with a series of discouraging economic indicators emerging, especially in the labor market. The S&P 500 index has fallen for four consecutive days, credit spreads are widening at the fastest pace since early August, and the PHLX Semiconductor Index plummeted by 12% – the largest drop since the outbreak of the pandemic.

As the S&P 500 index has risen by about 13% year-to-date, the current fluctuations may still appear as mere flashes in the bull market rise chart. Risk-sensitive assets are still largely pricing in a soft economic landing in the future. However, some worrying signs have gradually begun to emerge.

The most obvious sign is undoubtedly the rare unanimous trading behavior among cross-asset investors last Friday. With the negative impact of the hawkish Fed actions over the past two years gradually surfacing, US stocks joined a more than one-month decline in oil, copper, and US Treasury yields, affected by the economic-sensitive companies.

The well-known financial blog Zerohedge stated that the stock market's sharp drop last week may be even worse than the Black Monday in August. Because back in August, it was only a day of pain, and by the end of that week, the market had rebounded significantly. However, this time, the pain has just begun, starting poorly from last Monday, and becoming even worse later, leading to a widespread sell-off in the market...

"After hitting the snooze button more than ten times, sleepy investors may now be realizing the risks of an economic recession," said Michael O'Rourke, Chief Market Strategist at JonesTrading. "When you consider economic data and subsequent performance reports, the environment may only deteriorate."

Declining pricing.

In the US market, bond investors have always been called "smart money" because, right or wrong, they often anticipate changes in the direction of the economy. And this time is no different, the expectation of economic downside risk and continued Fed rate cuts has pushed the two-year Treasury yield to its lowest level since 2022.

Similar to the bond market, the commodity market has also issued warning signals regarding the prospects of consumption and investment cycles. The prices of the two major commodities that best measure global economic growth prospects have recently suffered heavy blows - oil prices have wiped out all their gains since 2024, and the "Copper Doctor" has fallen in 13 out of the past 16 weeks.

Although the US stock market in 2024 has shown different trends from the aforementioned cross-asset areas, last week's market indeed presented a clear omen: in early August, early signs of weakness in the US labor market sparked a tumble in bond yields and stock markets, but this volatility storm quickly subsided. However, the recent market volatility reflects the same concerns as the first episode of collapse - the economy may slow down rapidly and the Fed will have little ability to save the economy without emergency policy measures.

In a sense, the synchronous selling of risk assets may confirm that the US bond market has a more foresightful concern for the economy. JPMorgan strategist Nikolaos Panigirtzoglou and others have previously built a model to understand the pricing differences between stocks and credit and other assets in an optimistic economic growth scenario. By comparing the trends of various assets with past cycles, the model infers the probability of a recession predicted by the trends of various assets.

The model shows that as of last Wednesday, the pricing probability of a recession in the US economy is relatively low for stocks and investment-grade credit, at only 9%. In contrast, the pricing probability of a recession for commodities and government bonds is much higher, at 62% and 70% respectively.

Priya Misra, portfolio manager at JPMorgan Asset Management, said, "I don't think any market is truly pricing in a reasonable possibility of an economic recession, but all the data indicate that the risk of an economic recession is increasing. Currently, although there is much debate about the Fed cutting rates by 25 or 50 basis points in September, if an economic recession occurs, all markets will move accordingly. The positive effects of rate cuts will take some time to permeate the economy."

For Nathan Thooft, a fund manager at Allianz Asset Management, which manages $160 billion in assets, he expects a slowdown in the US economy to be unavoidable, but he believes the US economy will be able to avoid a "substantial recession." However, this has not stopped his company from reducing its holdings of stocks in recent weeks. Thooft points out that this is driven less by concerns about a significant downturn in the US economy and more by weakened technicals, reduced bullish sentiment, overvaluation, upcoming elections, and seasonal factors.

Currently, there is an unsettling phenomenon occurring in the changes of the US Treasury yield curve. Last week, the 2-year/10-year Treasury yield curve escaped its inverted state for the first time since mid-2022. Throughout history, the signals from statistical data have undoubtedly been ominous, as the past four economic recessions have started after the yield curve turned positive again. Although the prolonged period of inversion in recent years has led people to question whether the yield curve is still the most reliable indicator of an economic recession, no one can guarantee that this indicator has already malfunctioned.

In a report last week, Deutsche Bank strategist Jim Reid wrote, "Regardless of how you interpret it, a positively sloped curve (if we continue in this direction) is likely to bring a pivotal moment - whether the yield curve has had no warning effect on this cycle's recession, or whether its effect is just delayed compared to other cycles in history."