The S&P 500 plunged lower by more than 2% at the start of July, but has since recovered some of its losses. On the other hand, the Nasdaq 100 opened around 2% lower as well, but is now in the green by about half a percent. So, why are stocks down today?
Recession and inflation fears have sent the two benchmark indices lower in past months. Year-to-date, the S&P 500 is down about 21%, while the Nasdaq 100 is down about 29%. In fact, the S&P 500 is having its worst start to a year since 1970.
Now, several research firms are lowering their general domestic product (GDP) estimates, which is a major component of a recession. The National Bureau of Economic Research defines a recession as a decline in economic activity that lasts for several months. The decline in economic activity is visible in factors like GDP, wholesale-retail sales and employment. The other popular way to define recession is a decline in real GDP for two consecutive quarters.
Why Are Stocks Down Today?
Meanwhile, prices for West Texas Intermediate (WTI) crude oil futures are down over 9% today, falling below $100 for the first time since May. Neil Dutta of Renaissance Macro Research notes:
“Stock prices are down. Treasury yields are down. Oil prices are down. Corporate credit spreads are wider. The dollar exchange rate is higher. This is a recession trade.”
Citigroup believes oil prices could fall as low as $65 if a recession materializes. During the financial crisis from 2007 to 2009, oil prices soared as high as $160 per barrel, then crashed to less than $40. After that, prices stabilized around $90 per barrel and stayed there for four years. In addition, Citi analysts believe oil could fall as low as $45 per barrel “if oil-exporting countries don’t intervene to reduce supply.”
The non-farm payroll report and the unemployment rate will be released later this week. Economists estimate 275,000 will be reported for June, which is drastically lower than the 390,000 jobs reported in May. Furthermore, the unemployment rate is expected to be 3.6%.
Unemployment is a major indicator of a recession, but the two events do not perfectly correlate. In April of 2008, the unemployment rate stood at 5%, not much higher than the 4.7% reached six months prior. The rate didn’t peak until October of 2009 when it hit 10%. In contrast, the S&P 500 bottomed during March of 2009.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.