Good morning. The stock market meltdown on Monday was triggered by fears of a weakening economy, but a recession isn't imminent, according to an expert.
The latest market carnage began on Monday morning when Japan’s Nikkei 225 index suffered its worst day since 1987. By market close, the Dow dropped over 1,000 points following a 611-point loss on Friday. Meanwhile, the S&P 500 fell over 3.2%, and Nasdaq futures slid about 3.4%.
The spark that led to the broader global market sell-off was really the jobs report on Friday, which came on the back of a Federal Open Market Committee meeting on July 31, where the committee decided not to cut rates, Gregory Daco, chief economist at EY, told me.
“Some, including myself, called that a missed opportunity, given that the totality of the data does point towards ongoing disinflation and a cooldown in economic momentum,” Daco said. Interest rates remain in the range of 5.25% to 5.50%.
However, Daco added: “The premise that the U.S. economy is headed towards or in a recession is, in my opinion, misplaced.”
When you look at the broad range of economic indicators, there’s positive forward momentum; much slower than it was a year ago, but it's still positive, he said. The service sector is 90% of the U.S. economy, and Monday's ISM services index showed that the sector is back in expansion territory, and that purchasing managers view business conditions as steady to stable, Daco said. “Nothing to write home about, but nothing to panic about, either,” he said. “When 90% of the U.S. economy is doing okay, that's not a sign of an impending recession.”
I asked Daco about the implications of the stock market for finance leaders. “From a CFO perspective, now is not the time to panic,” he said. “Cool heads will prevail.” It's often good to look at the factors that affect one’s own business, and external conditions "before making any drastic reorientation of strategy," Daco said. There’s still positive job growth, and demand is still growing, not contracting.
Although there are still constraints in this high-cost, high-interest rate environment, as you look around the corner, you're going to see the Fed easing monetary policy, Daco said. "It's now becoming more clear that price growth inflation is much less potent than it was a few months ago, and it's continuing to decline," he said.
Daco also offered a related observation. “Something that I find extremely encouraging and that CFOs are aware of, is that productivity-growth efficiency has been rising, and that's helping business leaders offset the high cost of talent,” he said.
Daco noted that tech stocks have been the leading sector, driving stock market gains and equities over the past few years, with ups and downs, but more recently, they've been driving equities up. "Now, if you start to see a correction in the tech sector, it will have implications for the broader equity market in the U.S. and abroad," he said. "That is the risk scenario. But we're not there yet."
Sheryl Estrada
sheryl.estrada@fortune.com
The following sections of CFO Daily were curated by Greg McKenna.
