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“Opportunity often comes disguised in the form of misfortune or temporary defeat.”

— Napoleon Hill

Friday Eye-popping Charts

This week’s dramatic market moves are a reminder that economic expansions don’t die of natural causes — “they get murdered,” as former Fed Chair Ben Bernanke once quipped.

Usually, it’s Bernanke’s colleagues who are fingered for the crime — “the Federal Reserve has murdered every one of them,” according to the economist Rudi Dornbusch (referring to economic expansions, not Fed chairs).

But it’s not always the Fed’s fault — sometimes it’s a mishap in financial markets that spills over into the real economy and pushes us into recession, as was the case with the Savings and Loan debacle, the dotcom bubble and the great financial crisis.

On Monday, Japan’s Nikkei index had its worst down day since 1987, and it felt like financial markets, discombobulated by the yen carry trade, might break the economy again.

It didn’t help that last week’s jobs data was weak, the AI bubble may be bursting and Middle East tensions are rising.

On Thursday, though, the S&P had its best up day since 2022 and it suddenly felt like everything was fine again.

Weirdly, the catalyst for the big relief rally appeared to be a better-than-expected weekly jobless claims report — a report that’s been thoroughly ignored pretty much every other week it’s ever been reported.

What’s to make of it all?

It’s hard to say, of course.

On the one hand, mishaps in financial markets (like a rapidly unwinding yen carry trade) rarely have real-world consequences — even the 22% one-day crash in 1987 didn’t push the US economy into recession.

On the other hand, markets do seem significantly riskier than they were just a few weeks ago — Monday was the S&P’s second 2%+ down day in the last two weeks after having gone 356 sessions without one.  

If nothing else then, it’s a reminder that 1) markets are unpredictable — a Vanguard report found that the S&P 500 has historically finished either higher than the highest or lower than the lowest Wall Street forecast 75% of the time and 2) markets can impact the real world simply by spreading narratives — a recent academic study found that “beliefs about the economy spread contagiously” and that these narratives are “a significant cause of the business cycle.”

So the yen carry trade is probably not going to tip the global economy into recession — but the narratives about it just might.

Let’s check the charts.

Surprising?

This undramatic chart was the proximate cause of Thursday’s dramatic rally. US weekly initial jobless claims remain — to no one’s surprise but the market’s — near multi-decade lows.

Refusing to land:

Last week’s economic data and this week’s market moves have some saying the US is already in recession (see: the Sahm rule), but the Atlanta Fed’s GDP Now model still sees US GDP growing 2.9% in Q3. 

Still getting better — and fairer, too:

US wages continue to grow and they continue to grow fastest for the lowest-income workers (blue line, above).

It’s not all good news:

The golden age of office perks like free kombucha may be behind us. Less importantly, the biggest raises may be behind us, too.

Perception > reality:

People’s perception of the economy is more a function of their politics than, well, the economy. 

Also, a YouGov poll from last year found that “few Americans” were aware that the US economy was growing or that unemployment was unusually low.

The most important metric in the history of the world:

The Investors Intelligence survey of newsletter writers (!) found that 17% fewer of my esteemed (and overly excitable) colleagues are bullish on stocks compared to just two weeks ago — the largest two-week decline since the 1987 crash.

They are probably overreacting:

If the economy were about to break, you’d see it in the prices of high-yield bonds. The light blue line above shows that this week’s volatility in stock markets has not spilled over into high-yield bonds — which means it’s probably not spilling over into the real economy either.

Reality matters:

One real effect of this week’s market turbulence was to make a September Fed rate cut more likely. After that, what the market does is simply a function of what the economy does. If the economy stays out of recession thereafter (the most likely scenario), stock markets should do very well (the red line, above). If not, they won’t (the yellow line).

Buying when markets are in turmoil:

This week’s selloff was over too quickly to warrant a “Markets in Turmoil” special on CNBC, but Charlie Biello’s table above shows that when markets are perceived to be in turmoil, they don’t stay that way for long.

Is this week’s markets misfortune a similar buying opportunity in disguise?

Only time — and the charts — will tell.

Have a great weekend, opportunistic readers.

— Byron Gilliam

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