Dubai: Hisham Mukhanh
The summer recovery in US stocks is gaining increasing confidence among investors who are studying market trends, raising hopes for the remainder of this year. After posting its worst half-performance since 1970, the S&P index rebounded regarding 15% from its low in mid-June, buoyed by stronger-than-expected corporate earnings, on the hope that the economy can also avoid a recession even with a Fed hike. Fed interest rates to tame inflation.
Previous gains in stocks were short-lived this year; So many market participants believe that optimism is premature. Federal Reserve officials have done their best to ensure that the central bank has a lot of work to do to reduce inflation, and we may see them at the next “Jackson Hole” meeting, scheduled for the 26th of this month, retracting their pessimistic expectations regarding the pivotal pivot. Monetary policy, one of the narratives that helped advance stocks.
The Standard & Poor’s index closed down by 1.29% on Friday, ending a four-week winning streak. However, those who look to “market phenomena” such as breadth, momentum and trading patterns to inform their investment decisions see a more optimistic picture, and are convinced that recent gains in stocks are unlikely to fade.
“There are a lot of real indications that the drop we saw in June is certainly more permanent than the drop in May or March,” said Willie Delwich, investment strategist. However, we should not worry at this point.”
Narrow width
Among these actions that appear before us, there are indications of a “broadening” of the market movement or whether a large amount of stocks are rising or falling in unison. Here, it is worth noting the period of supply narrowing that occurred late last year, and came as a worrying sign for some investors, and preceded the beginning of a decline in the S&P index. Indeed, stocks fell by regarding 21% in the first half of 2022. This trend has recently reversed, and new gains on the New York Stock Exchange and Nasdaq last week surpassed their mid-June lows on a weekly basis.
Ed Clesold, chief strategist at Ned Davis Research, says the start of sustainable gains usually begins with a large proportion of stocks rising together. Accordingly, the company recently increased its recommended exposure to US stocks to “neutral” instead of “negative”; Some indicators have turned positive.
The bullish market also tends to maintain its momentum, with Delwich forecasting a 15% or more rise in S&P in 40 trading days, followed by an additional average profit of 15.3% next year.
According to Sam Stovall, chief investment analyst at CFRA, one important technical indicator plunged sharply earlier this month when S&P reclaimed 50% of its value in a bear market. Since the Second World War, the index has not continued to record a new low following this step.
Strength begets strength
Analysts from Bank of America Global Research commented that some indicators do not support further gains, and that stocks have historically fallen to the bottom when the sum of inflation and the price-to-earnings multiplier (P/E) was less than 20 times, and today it is 28.5 times, according to what the bank wrote. Wednesday.
At the same time, the US Treasury yield curve usually slopes to the bottom of the market. However, the current shape of the curve shows yields on short-term bonds that exceed those of many long-term bonds, a sign that preceded previous recessions.
In turn, Citigroup strategists noted earlier last week that S&P had already so far risen to their year-end target of 4,200 points, and that a tactical sell-off to gain further momentum was warranted. In fact, three previous bounces were reversed in the index this year, leading to its decline to new levels. But Willie Delwich thinks the move today might be different. As the force is more likely to generate more force.
“Jackson Hole”
Central bankers, at their grand annual meeting next Thursday and Friday in the American city of Jackson Hole, are discussing the dilemma of the need to raise interest rates in the face of inflation, but not so much to avoid pushing the economy into recession.
The Grand Teton Mountains (Wyoming) host this meeting every year, led by the US Federal Reserve, since the era of its former chairman Paul Volcker.
The speech of US Federal Reserve Chairman Jerome Powell, which will be delivered on Friday at 2:00 GMT, will be the most awaited moment in this “symposium”.
European Central Bank President Christine Lagarde will not travel to the United States to participate in the event, but Isabelle Schnabel, a German member of the European Central Bank’s Executive Board, will travel there, where she will participate on a committee Saturday.
In turn, Andrew Bailey, Governor of the Bank of England, confirmed that he would be present in Jackson Hole to observe the discussions without participating in them.
“The cards on the table on the economic level are this: a common enemy is inflation and the risk of the economy slowing too much,” Grigory Volokhin, portfolio manager for Mischaert Financial Services, told AFP. You have to choose between the two.”
However, he notes, “The Fed cannot say that it should choose (…) to raise unemployment to reduce inflation, but that is the option it has.”
“Transformation”
This meeting is taking place at a time when central banks around the world are tightening their fiscal policies to combat inflation, with the risk of derailing the recovery.
The US Federal Reserve has raised interest rates four times since March. It started with a quarter of a percentage point, before accelerating the pace.
Inflation also began a welcome slowdown in July to 8.5% on an annual basis, following surpassing in June a record price increase in more than forty years, to more than 9.1%.
Attention now turns to the next monetary meeting on September 20-21, when another sharp rate hike by half or even three-quarters of a percentage point will be proposed.
“It is unlikely that the Jackson Hole conference will bring real news regarding the Fed’s plans for a future rate hike,” says Carola Bender, who studies economics at Haverford University (Pennsylvania).
The rates range between 2.25 and 2.5%, meaning they are close to the so-called “neutral” level that neither stimulates nor slows the economy, which is evaluated between 2 and 3%.
Jonathan Millar, an economist at Barclays, notes that Jerome Powell “will seek (in his speech) to shed light on the possible shift in monetary policy in the future. One of the things they want to communicate is that they continue to focus very strongly on the problems of price stability.”
credibility
Mazen Issa, a specialist in the foreign exchange market at TD Securities, expects that “Jackson Hole will be very important to highlight” the theory of maintaining high rates, despite the economic slowdown.
And US GDP actually contracted in the first two quarters of the year, matching the classic definition of a recession.
However, economists consider that the case is not the case today in the United States, and this is especially due to the solidity of the labor market, which returned in July to the pre-epidemic level, where the unemployment rate reached 3.5%, and all jobs that witnessed severe damage were re-created.
A year ago, during this “forum”, Jerome Powell referred to “temporary factors” and warned of the dangers of premature tightening of fiscal policies. But since then, inflation has turned out to be stronger than expected, surpassing central bankers’ expectations.
In the Eurozone, the price hike reached a new record high of 8.9%, while Britain is also experiencing inflation reaching 10.1%.
Therefore, Carola Bender, in an interview with AFP, points out that “there has to be a lot of discussion regarding whether there is significant damage to credibility”, in light of the error in estimating the path of inflation, and regarding “what can be done to fix it.”
