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Market Analysis

Economic Worries Cast Shadow Over US Stocks Rally
Amos Simanungkalit · 11.9K Views

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Economic concerns are resurfacing on Wall Street as apprehensions grow that months of elevated interest rates might be starting to hamper U.S. growth.

For months, investors were optimistic due to cooling inflation and gradually slowing employment, believing these trends supported the case for the Federal Reserve to begin cutting interest rates.

Now, with a September rate cut anticipated following a recent Fed meeting, investors are worried that the central bank may have maintained restrictive rates for too long, potentially impacting economic growth.

This shift in sentiment was evident on Thursday when data revealing weakness in the labor market and manufacturing sector triggered a sharp selloff in U.S. equities. Investors sold off chip stocks and industrials, while flocking to defensive investments. Tech stocks, in particular, saw significant declines, extending losses to nearly 8% from a record high in July.

"The prevailing narrative was that rate cuts were due to inflation nearing the target while other aspects remained stable," said Angelo Kourkafas, senior investment strategist at Edward Jones. "However, there are now visible cracks in that narrative."

These concerns have turned attention to upcoming releases, such as Friday's employment data and a forthcoming inflation report, which could heighten worries if they indicate further economic weakness.

Next week will feature earnings reports from industrial giant Caterpillar (NYSE:) and media conglomerate Walt Disney (NYSE:), providing more insight into consumer and manufacturing health. Reports from healthcare companies, including weight-loss drugmaker Eli Lilly (NYSE:), are also expected.

Thursday's futures market bets reflected growing economic unease. Fed fund futures showed traders pricing in over a 25% chance of a 50-basis point cut at the Fed's September meeting, double the odds from the previous day, according to CME FedWatch. Futures also priced a total of 85 basis points in rate cuts for 2024, up from just over 60 basis points on Wednesday.

"The initial comfort the market took in the Fed being on track for a September rate cut has shifted to the reality that much time remains before the September meeting," said Yung-Yu Ma, chief investment officer at BMO Wealth Management.

Broader markets also exhibited signs of unease. The Cboe Volatility Index, known as Wall Street’s fear gauge, is near a three-month high as demand for options protection against a stock market selloff rose. Concerns over fresh turmoil in the Middle East further contributed to investor nervousness.

Investors are favoring sectors such as utilities and healthcare, which are typically seen as safe havens during economic uncertainty. Options data for the Health Care Select Sector SPDR Fund indicated the most bullish balance between put and call contracts in about three years, according to Reuters analysis of Trade Alert data. Trading in options on the Utilities Select Sector SPDR Fund also showed reduced defensive positioning, underscoring expectations of strength in the sector.

The healthcare sector has risen 4% in the past month, while utilities have climbed over 9%. In contrast, tech stocks have declined 11% during this period, with sharp losses in companies like Nvidia (NASDAQ:) and Broadcom (NASDAQ:).

Some investors suggest that recent data might simply be an excuse to lock in profits after the market's strong performance in 2024.

"What we're seeing now, and likely for the next month or two, is some consolidation and sideways price action," said Bill Strazzullo, chief market strategist at Bell Curve Trading. "The larger bullish trend remains intact."

More earnings reports are expected in the coming weeks, including Nvidia at the end of the month, while the U.S. presidential race could add to market volatility.

"It’s a delicate balance because you want just enough economic weakness for the Fed to cut rates, but not so much that it negatively affects corporate earnings," said Burns McKinney, a portfolio manager at NFJ. "The Fed has been like a surfer trying to ride a wave and time everything perfectly."

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.

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