The Dow and broader stock market bled lower on Tuesday, pushing Wall Street’s major indices further from their all-time highs in the wake of a titanic disruption to the global oil market.
Meanwhile, one Deutsche Bank strategist warns that the market could suffer a reckoning as the US economy lurches closer to a recession.
Dow Extends Weekly Pullback
The Dow Jones Industrial Average opened to moderate losses on Tuesday, falling 53.11 points or 0.20% to 27,023.71. The DJIA risks falling for a second straight day after stringing together eight consecutive gains.
Dow Inc. was the index’s worst performer, sliding 2.46%. Walgreens, Home Depot, Caterpillar, Intel, Goldman Sachs, Cisco, 3M, JPMorgan, and IBM all fell more than 1%.
The S&P 500 declined 0.93 points or 0.03% to 2,997.01. Five of 11 primary sectors reported declines. Energy was the index’s laggard, dropping 1.7% in response to a moderate oil price decline.
The Nasdaq dipped 7.09 points or 0.09% to 8,146.45.
Deutsche Bank Chief Strategist: US Economy Crawling Toward Recession
The catastrophic attack on Saudi Arabia’s oil production infrastructure has reignited recession fears, placing pressure on the Dow and its peers as they continue to trade slightly below their all-time highs.
While the drone strike isn’t likely to directly inhibit US growth in a meaningful way, it could have an indirect influence once rising oil costs reach your local filling station. Gas prices, research shows, are inversely correlated with consumer confidence.
Strong consumer sentiment – and spending – have buoyed the US economy’s outlook despite concerning housing data and contractions in manufacturing.
But perhaps not for much longer.
Binky Chadha, the chief global strategist and head of asset allocation at Deutsche Bank, told MarketWatch that the economy – and stock market – are due for a reckoning.
Chadha specifically pointed to slowing US jobs growth, which he claims is languishing at its lowest annual rate in a decade.
“Every time payrolls growth has gone below 1%, the U.S. has ended up in recession. We would argue the US economy is dangerously close to…tipping into recession,” Chadha told the publication. “We are cautious on stocks. We would argue you want to be defensively positioned [and] we would argue that the US equity market has run way, way ahead of growth,” he said.
To be sure, Wall Street bears have been pounding the recession drum for more than a year. Their warnings appeared vindicated when the stock market tanked in late 2018, and many have continued to sound the alarm despite this year’s mammoth recovery.
However, Chadha is anything but a perma-bear. In fact, it wasn’t so long ago that he described himself as “very bullish,” predicting that the S&P 500 would surge to 3,250 to close out the year.
Chadha Calls for 13% S&P 500 Sell-Off as Fed Decision Looms
Now, though, he says the market is wildly overvalued, and he doesn’t expect his forecast to materialize unless the S&P 500 suffers a steep correction first.
How steep? Chadha said that the S&P 500 should be valued at 2,600, more than 13% below its current level near 3,000.
That’s a lot for Wall Street to chew on as the Federal Reserve begins its two-day FOMC policy meeting today. Investors expect the central bank to adopt its second consecutive 25-basis point interest rate cut, and most traders are paying more attention to how Fed Chair Jerome Powell characterizes that policy adjustment.
However, if Chadha’s right, and the US economy is sliding toward an inevitable recession, that rate cut likely won’t be enough to sustain the expansion.
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