Finance
Rising economic concerns threaten the recovery of US stocks
By Lewis Krauskopf
NEW YORK (Reuters) – Economic concerns are back on Wall Street’s radar as concerns grow that months of high interest rates could hurt U.S. growth.
For months, investors were encouraged by declining inflation and the gradual slowdown in employment, believing it strengthened the case for the Fed to start cutting rates.
With a September rate cut in sight following a Fed meeting earlier this week, investors are concerned that the central bank may have left rates at restrictive levels for too long, which could take a toll on economic growth.
Evidence of such a shift in thinking came Thursday, when data showing weakness in the labor market and manufacturing sectors led to a sharp sell-off in U.S. stocks, with investors dumping everything from chip stocks to industrial stocks as they turned to defensive measures poured. Highly valued technology stocks tumbled, pushing losses on the Nasdaq Composite to nearly 8% from a record high set in July.
“The story is that rate cuts are just because inflation is moving closer to target, while everything else remains pretty solid,” said Angelo Kourkafas, senior investment strategist at Edward Jones. “But now there are some cracks.”
The concerns put a spotlight on upcoming releases — such as Friday’s employment data and an inflation report later this month — that could worsen concerns if they show further signs of weakness.
Next week comes earnings from industry whistleblower Caterpillar and media and entertainment giant Walt Disney, which will provide more insight into consumer health and the manufacturing sector, as well as reports from healthcare heavyweights such as weight-loss drug Eli Lilly.
Bets on the futures markets on Thursday signaled growing unease about the economy. Fed funds futures reflected that traders had pegged a more than 25% chance of a 50 basis point cut at the central bank’s September meeting, doubling the odds from a day earlier, CME FedWatch said. Futures have priced a total of 85 basis points of rate cuts in 2024, compared to just over 60 basis points on Wednesday.
“The comfort (the market) took yesterday from the feeling that the Fed was on track for a rate cut in September has turned into the reality that there is a lot of time between now and that September meeting,” said Yung-Yu Ma, chairman of the bank. investment officer at BMO Vermogensbeheer.
The broader markets also showed signs of unease. The Cboe Volatility index – known as Wall Street’s fear gauge – is near a three-month high as demand for option protection against a stock market sell-off increased. Concerns about new unrest in the Middle East also contributed to investor nervousness.
Meanwhile, investors have shown a preference for sectors such as utilities and healthcare – popular options in times of economic uncertainty.
Options data for the Health Care Select Sector SPDR Fund showed the average daily balance between put and call contracts last month was the most bullish in about three years, according to a Reuters analysis of Trade Alert data.
Options trading on the Utilities Select Sector SPDR Fund also shows a pullback in defensive positioning, underscoring traders’ expectations for the sector’s strength.
The healthcare sector is up 4% in the past month, while utilities are up more than 9%. By contrast, the Philadelphia SE Semiconductor index is down 11% in that period, amid sharp losses at investor favorites like Nvidia and Broadcom.
To be fair, some investors said the numbers could just be an excuse to lock in gains after the generally strong market run in 2024.
“What you’re seeing now, and you’ll probably see it over the next month or two, is some kind of consolidation and sideways price action,” said Bill Strazzullo, chief market strategist at Bell Curve Trading. trend is intact.”
Investors will have more earnings reports to chew on in the coming weeks, including Nvidia at the end of the month, while the US presidential race could increase volatility.
“It’s such a fine line because you want just enough economic weakness that the Fed will have to cut rates, but not so much that it’s bad for corporate profits,” said Burns McKinney, portfolio manager at NFJ. “The Fed is almost like a surfer riding a wave, trying to time everything just right.”
(Reporting by Lewis Krauskopf; additional reporting by Saqib Iqbal Ahmed, David Randall and Chibuike Oguh; Editing by Ira Iosebashvili and Edwina Gibbs)
