US Stocks Plummet Amid Recession Fears

US stocks experienced a significant decline on Monday, with the S&P 500 trading 2.5% lower and the Nasdaq Composite falling into correction territory, down more than 10% from its record high on July 10. The selloff was driven by fears of a potential recession in the world's largest economy, as investors reacted to disappointing employment data and concerns over elevated valuations in the tech sector.

The Nasdaq 100, dominated by tech giants, tumbled 5.4% in early trade before recovering to a 2.1% loss. Stocks of companies like Amazon, Intel, and Nvidia were hit hard by poorly-received financial results and worries over their valuations. The VIX index, a measure of market volatility, jumped to its highest level since the start of the COVID-19 pandemic in 2020.

Recession Fears Intensify

Traders have been betting that the Federal Reserve will be forced to aggressively ease monetary policy to avoid a recession, with money markets giving around a 60% chance that policymakers will announce a rare emergency 0.25 percentage point rate cut within a week[1]. Analysts at Goldman Sachs have given a 25% probability that the US will slip into a recession, while JPMorgan gave a 50% likelihood.

The latest data for non-farm payrolls, published on Friday, showed a 114,000 increase in July, one of the weakest postings since the pandemic and well below the 175,000 economists had expected, while job growth for the prior two months was revised lower[1]. The unemployment rate also hit a three-year high of 4.3%, overshooting expectations of 4.1%.

Experts Advise Against Panic Selling

Despite the market volatility, financial professionals emphasise the importance of avoiding emotional decisions that could hinder the long-term growth of investment portfolios. Lee Baker, a certified financial planner and owner of Apex Financial Services, cautioned investors against succumbing to panic-selling, noting that it can significantly damage a portfolio.

Research indicates that many investors tend to sell in a frenzy during turbulent times, often missing out on market rebounds while their cash remains idle. "The recovery can occur just as swiftly," Baker explained, adding that missing out on key recovery days "can devastate your portfolio." He referenced a study by J.P. Morgan, which found that avoiding the 20 best market days from January 1, 2003, to December 30, 2022, would have halved total returns.

Focus on Controllable Factors

During volatile market conditions, it is vital to concentrate on aspects within one's control, rather than becoming overwhelmed by general economic unpredictability, advised Douglas Boneparth, a certified financial planner and president of Fide in New, who is also affiliated with CNBC's Financial Advisor Council. Having sufficient cash reserves can help manage emergencies or seize opportunities, he noted.

While many experts suggest maintaining cash reserves equivalent to three to six months of living expenses, Boneparth advocates for a buffer of six to nine months, which he believes supports a steady approach in the aftermath of stock market declines. If cash reserves are insufficient, he recommended reassessing strategies to replenish them.

Positive Economic Data Eases Recession Fears

However, new data released on Monday should ease fears that the US is facing an imminent downturn. The ISM services index climbed to 51.4, ahead of expectations and up from 48.8 in June. There was particularly strong growth in the employment index, which will calm investor nerves after last week's employment report.

Stephen Brown, deputy chief North America economist at Capital Economics, said the data should "soothe recession fears". He recognised that the index remained "weak" but argued it was "hardly consistent with the economy or labour market falling over a cliff". "There was no mention of the dreaded R-word from respondents in the accompanying press release either," he added.

Similarly, S&P's purchasing managers' index (PMI) painted a fairly positive picture, with activity rising "markedly" in July. The PMI came in at 55.0, a little lower than last month but well ahead of the 50 no-change mark. "The PMI surveys bring encouraging news of a welcome combination of solid economic growth and cooler selling price inflation in July," Chris Williamson, chief business economist at S&P Global Market Intelligence, said.

While US stocks have experienced a significant decline amid recession fears, experts advise investors to maintain a long-term perspective and avoid panic selling. By focusing on controllable factors, such as maintaining sufficient cash reserves, investors can navigate the volatility and potentially capitalise on opportunities that may arise from market corrections. The positive economic data released on Monday suggests that the US economy may be more resilient than initially feared, providing some relief to investors concerned about an imminent recession.

Brent Nicholls, US Editor