In August, market volatility entered rare territory as the S&P 500 and NASDAQ experienced significant drops. The VIX, a measure of market volatility, reached levels seen only 15 times in the last 30 years. While previous U.S. recessions were preceded by similar activity, economists at BMO believe that the U.S. economy will likely avoid a full-blown recession, although the likelihood has slightly increased. They caution investors to “separate the noise from the signal” when analyzing the market’s fear index.
The VIX, or Chicago Board Options Exchange (Cboe) Volatility Index, uses fluctuations in S&P 500 index options prices to gauge market volatility. A very stable VIX falls between 0 and 15, while levels over 30 are considered highly volatile. During the recent market plunge, the VIX crossed 60 and closed above 38, indicating heightened levels of volatility. Looking at historical data, the economists found that major market dislocations have often preceded recessions, but they emphasize that not all dislocations lead to an imminent recession.
Despite concerning economic indicators such as breaking the Sahm Rule and an inverted yield curve, the economists believe that the U.S. is likely to steer clear of a recession, barring any major external shocks. They point out that markers like real GDP, retail, auto sales, and industrial production do not currently suggest a recession. However, they acknowledge that recession risks have increased, estimating the odds of a recession within the next 12 months at around 35 percent. Canada’s softer economy and extreme violation of the Sahm Rule on unemployment are also noted, with the Bank of Canada taking preemptive measures by implementing interest rate cuts.
Amidst the economic uncertainty, the economists highlight the importance of monitoring external factors that could potentially impact the economy. They acknowledge that the current economic cycle is unique, which may result in deviations from traditional indicators like the Sahm Rule and the inverted yield curve. While the current situation poses increased risks of recession, they maintain that the U.S. is positioned to avoid a full-blown economic downturn. The Bank of Canada’s proactive measures are seen as a positive step in supporting economic growth and mitigating recessionary pressures.
As global markets remain volatile and economic indicators fluctuate, investors are advised to maintain a cautious approach and seek to differentiate between short-term noise and long-term economic trends. While the path forward may be uncertain, proactive monetary policy measures and economic resilience could potentially steer the economy away from recessionary pressures. By staying informed and monitoring key indicators, investors can make informed decisions amid the evolving economic landscape. In conclusion, while recession risks have increased, there remains optimism that the U.S. and Canadian economies can navigate through challenging times with the support of sound economic policy and resilience.
