2023-09-04 22:48:16
Posted on: Tuesday, September 5, 2023 – 1:47 am | Last updated: Tuesday, September 5, 2023 – 1:47 AM
The stock market rally stalled in August 2023 as the market pondered whether or not the latest batch of strong economic data will force the Fed to issue another rate hike at least once before the end of the year.
The S&P 500 fell 1.4% in August, bringing its year-to-date gains down to 18.8%, as investors were frustrated by comments made by Federal Reserve Chairman Jerome Powell at the Jackson Hole Economic Symposium that were suggesting Possibility of further tightening of monetary policy.
Meanwhile, second-quarter earnings numbers were in the market Stock trading Mixed as companies continue to struggle with rising costs and the prospect of an economic downturn in the United States.
Are interest rates going up?
Inflation, interest rates and the labor market are likely to continue to dominate Wall Street headlines in September.
The consumer price index increased by 3.2% on an annual basis in July, down from the peak inflation levels of 9.1% in June 2022, and less than economists’ estimates of 3.3%, and the headline CPI reading increased by only 0.2% on a monthly basis for the second month in a row .
In his annual address at the Jackson Hole Forum last August, Powell said that inflation remains “very high” and warned investors that “we are ready to raise interest rates even further.” Powell also said that the combination of slowing inflation and a strong economy would allow the Fed to “move forward.” with caution” in future meetings.
At its last meeting in July, the Federal Open Market Committee adjourned interest rates by another 25 basis points to reach a new range of 5.25%-5.5%, its highest target range in 22 years, and economists expect the FOMC to maintain interest rates at their current levels at its next meeting, which concludes on September 20.
Investors still care what the Fed will do, but at this point since they have either finished raising interest rates or are very close to the end of the tightening cycle, the fundamentals of corporate earnings will be the main focus once more.
The bond market is projecting a 44.4% chance that the FOMC will raise interest rates by at least another 25 basis points by November, and the market is also projecting a 59.5% chance that the FOMC will cut interest rates from their current levels by May 2024.
Watch the US Recession
In August, the Federal Reserve received mixed news regarding its efforts to deal with the “soft landing” of the US economy, in addition to lower-than-expected consumer price inflation, and the personal consumption expenditures (PCE) price index rose 3.3% year-on-year in the previous month. July, up from its 3% gain in June. Core personal consumption expenditures inflation (which excludes volatile food and energy prices and is the Fed’s preferred measure of inflation) rose 4.2% in July, in line with economists’ estimates and still well above the target. The Federal Open Market Committee of 2%.
As prices continue to rise, it appears American labor market There are also signs of a slowdown, and the Department of Labor stated that the US economy added 187,000 jobs in July, which is less than economists’ estimates of 200,000, and the ratio of unemployed to job opportunities in the United States was regarding 0.7 in July, its highest level since September 2021. However, the US unemployment rate remains at just 3.5% and in Powell’s speech in Jackson Hole he said that bringing inflation back to 2% will likely require “some easing of labor market conditions”.
It can be very difficult for the FOMC to justify pausing interest rate hikes until the labor market has calmed down further, and the more the Fed has to raise interest rates to control inflation, the higher the odds of an economic fallout at some point.
This risk is reflected in the US Recession Likelihood Index released by the Federal Reserve Bank of New York, which still predicts a 66% chance of a recession within the next 12 months.
While FOMC officials are no longer calling for a recession, the Fed’s latest economic projections in June point to a sharp decline in US GDP growth in the second half of 2023 and into 2024.
Profits slowdown
Even if the United States avoided a recession, the impressive rise of the S&P 500 in 2023 was not supported by basic economic fundamentals, the index companies reported negative earnings growth for the third consecutive quarter on an annual basis in the second quarter, and on the other hand, they crept The forward price-to-earnings ratio on the S&P 500 is 19.2, which is regarding 10% above its 10-year average of 17.4.
Earnings for the S&P 500 fell 5.2% year-on-year in the second quarter, the largest drop in market earnings since the third quarter of 2020.
The energy sector was the biggest drag on S&P 500 earnings as it posted a 51.4% drop in earnings in the second quarter amid very tough comparisons to 2022, as the war in Ukraine and global commodity inflation sent energy prices higher in 2022 and helped many oil stocks. Gas achieved record profits last year.
For now, analysts expect S&P 500 earnings growth to rebound into positive territory in the second half of 2023, and analysts expect S&P 500 earnings to grow 0.2% year over year in the third quarter and another 7.6% in the fourth quarter. .
However, one market analyst says analyst earnings estimates have been heading in the wrong direction lately, and he adds that a very clear negative revision to earnings at US tech companies over the past few weeks goes a long way to explaining why the Nasdaq Composite suffered in August (which posted a slump). By regarding 4.5% following its strong performance in the period from January to July, this is why more weakness is expected in September, as analysts sharpen their pens and trim the numbers for the third quarter, fourth quarter and 2024.
The lackluster market performance in August was certainly disappointing for investors, but September has historically been the worst month of the year for the US stock market. In fact, the S&P 500 posted an average decline of 1.1% in the month of September since 1928. It is the worst performance ever for any month of the year, so stock market volatility is expected to continue into September as investors appreciate the possibility of an economic slowdown.
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