Recovery in the stock markets after severe crash – Experts remain skeptical

After the significant sell-off on Monday, which resulted in the worst day for major stock indices in nearly two years, the markets saw a slight recovery on Tuesday. The S&P 500 rose by almost 1%, while the technology-oriented Nasdaq Composite gained 0.6%. The Dow Jones Industrial Average also increased by three-quarters of a percent. Japan's Nikkei Index also contributed to the recovery, rebounding from its worst day in a generation on Monday and posting a 10.2% gain, its best day since 2008. However, Tuesday's gains are unlikely to make up for Monday's losses. The Dow fell by more than 1,000 points or 2.6%, the S&P declined by 3%, and the Nasdaq lost 3.4%. Some market participants deemed Monday's downturn as exaggerated. Analysts from Goldman Sachs emphasized in a note to their clients that central banks like the Federal Reserve are "no longer constrained by the fear of high inflation" and are prepared to cut interest rates. Additionally, investors have built up substantial cash reserves, which could now be used to purchase the suddenly cheaper stocks. Corporate debt is also low, meaning companies are better positioned to absorb the impact of slower growth compared to many other downturn phases. However, there is disagreement about the speed of the economic downturn. Citibank analysts disagreed with the notion that the labor market report released on Friday, which showed an unexpected increase in the unemployment rate to 4.3% and merely 114,000 new jobs in July, was just an outlier. "The unfortunate reality is that a range of data confirms what the rise in the unemployment rate now clearly signals – the U.S. economy is at best at risk of a recession and at worst is already in one," they wrote in a note to their clients, pointing to various data – from a sharp slowdown in hiring to rising jobless claims – indicating a worse situation than assumed. The focus remains on the Federal Reserve, which balances inflation and employment growth through interest rate adjustments. After the Fed announced last week that it would keep rates unchanged, some analysts now view this decision as a misstep. Citi analysts predicted an unusually large rate cut of 50 basis points at the next meeting in September and also consider a possible emergency meeting – typically only held during crises – as "plausible." "Data next month is expected to confirm the continued weakening," they assessed. However, other experts dispute the necessity of such a drastic measure. Torsten Slok, Chief Economist at Apollo Global Management, stated in a note on Tuesday that the economy is in an acceptable condition. "If the economy were crashing, default rates would be skyrocketing, and the data do not show that," he wrote.