Market sell-off could become ‘self-fulfilling prophecy,’ Morningstar warns

Morningstar DBRS analysts warned that the recent global sell-off leading to continued market declines could become a “self-fulfilling prophecy” and ultimately lead to a recession.

“We believe the immediate impact of the sharp market decline will be limited,” they said in a note released on Monday.

“Our biggest concern is that the market sell-off becomes a self-fulfilling prophecy, causing CEOs to cut investment and consumers to cut spending, leading to further cuts and a recession,” the analysts added.

Global markets have plummeted since last weekend, with Japan's Nikkei 225 index falling more than 12% on Monday, and the U.S. S&P 500 index recording its worst day in nearly two years at the beginning of this week. Technology and bank stocks were hardest hit.

Markets on Tuesday recouped some of Monday's losses.

The sharp decline in the global economy comes after a weaker-than-expected U.S. jobs report on Friday. Non-agricultural employment in July was only 114,000, far lower than the expected 185,000 and also significantly lower than last month's data. The unemployment rate rose to 4.3%.

The data raised concerns about the state of the world's largest economy and whether it was headed for recession, and raised questions about whether the Federal Reserve was wrong not to cut interest rates at last week's meeting.

Morningstar analysts said on Monday that economic data showed the U.S. economy was “slowing but still growing,” noting that the unemployment rate remained below the so-called natural level of 4.4% expected by the Congressional Budget Office.

At the same time, according to data released last month, US gross domestic product (GDP) preview data showed economic growth of 2.8% in the second quarter.

Morningstar said conversations with Bank of America's management team and recently released earnings and guidance are further evidence that the bank is not particularly concerned that a soft landing is in danger.

Analysts also said that even if markets fall further or the U.S. slips into recession, the impact of market volatility on banks is likely to be limited.

Morningstar said: “Despite the sharp decline in global equity markets, we continue to view banks in the U.S. and other major markets as resilient, with ample capital and liquidity buffers even if stocks continue to fall or the U.S. enters a recession.” Notes.

Analysts explained that most U.S. banks have small equity positions in their portfolios and balance sheets, and the impact on bank wealth and asset management fees will be offset by an earlier boost from rising market estimates.

“Capital market participants generally benefit from volatility, although rapid valuation changes can result in potentially higher losses if not appropriately hedged,” they noted.

Bank of Japan's capital management is also expected to be “not materially affected”, with capital management in the region also seeing a sharp decline.