US stocks sold off Friday following a weak jobs report for August. But one economist predicts market volatility will likely continue in the months ahead.
“I do think we’re probably in an environment now where volatility is going to stay elevated,” Michael Darda, chief economist and macro strategist at Roth Capital Partners, said on Yahoo Finance’s Stocks in Translation podcast. “The risk of a more material pullback and/or correction is quite high.”
Darda pushed back against the idea that the US economy will achieve a “soft landing,” a scenario in which higher interest rates lead to lower inflation without a major hit to economic growth.
“We’re skating on ice that’s a bit thinner than a lot of people presume,” he said.
Darda pointed to a rising unemployment rate and elevated earnings expectations, both of which contributed to the stock market routs seen at the start of August and September.
“It’s not unprecedented to have a slowdown period that looks like a soft landing, and then a recession ends up taking shape,” he said. “That’s sort of unexpected now because many have been lulled into this idea that the soft landing is going to be a permanent state of affairs for the business cycle. Equity market valuations reflected that coming into the summer.”
“But there’s been some cracks in the business cycle,” he cautioned, noting expectations for the economy, corporates, and the stock market have remained at “super high” levels.
But it hasn’t just been earnings. The jobs market is also telling a particular story.
Last month, the July jobs report spooked markets after unemployment unexpectedly rose to 4.3%, its highest level in nearly three years. The move higher also triggered a closely watched recession indicator known as the Sahm Rule.
Although unemployment ticked slightly lower to 4.2% in August, Darda warned that the accelerated rise in unemployment is still “a bit concerning.”
“4.3% is still an incredibly low unemployment rate level that looks quite good in the historical context,” he explained. “The problem, if there’s a problem, is that we’re up to 4.3% from a cyclical trough of 3.4%.”
“Those kinds of movements and the level tell us that the economy, if it’s still growing, is growing below trend or below the growth rate of potential,” he said. “There’s an exceptionally fine line between that and an actual recession.”