Morningstar DBRS analysts have warned that sustained market declines following the recent global sell-off could lead to a recession through a “self-fulfilling prophecy.” They expressed concern that corporate CEOs might cut back on investments and consumers might reduce spending, which could further deepen the economic downturn.
The global market downturn began last week, with Japan’s Nikkei 225 dropping over 12% on Monday and the U.S. S&P 500 experiencing its worst day in nearly two years. The decline was triggered by a weaker-than-expected U.S. jobs report, which showed nonfarm payrolls at 114,000 in July, far below the projected 185,000, and an increase in the unemployment rate to 4.3%.
Despite the market volatility, Morningstar analysts believe the impact on U.S. banks and other major markets will be limited. They noted that banks are resilient with sufficient capital and liquidity buffers, even if the market continues to decline or the U.S. enters a recession. They also highlighted that banks’ exposure to equities is minimal and any potential losses from market volatility could be offset by previous gains from higher market valuations.
