Goldilocks’ economy and rate peak boost US stocks on Wall St.
Goldilocks' economy and rate peak boost US stocks on Wall St.
U.S. Stock Market Investors Emboldened by Resilient Economy and Monetary Policy Outlook
/cloudfront-us-east-2.images.arcpublishing.com/reuters/PB3ZT4VESRL35AADMLXZG5QZE4.jpg)
The U.S. stock market is experiencing a surge, with investors feeling increasingly optimistic due to a resilient economy and positive outlook on monetary policy by the Federal Reserve. Despite concerns over rising valuations and the potential for inflation, stock investors remain emboldened and have witnessed remarkable gains this year.
The S&P 500 has soared nearly 19% so far this year, including a 1% increase in the past week. The market has experienced a 10-percentage point climb since June 1, a time period marked by the U.S. government averting a debt ceiling default, cooling consumer prices, and sustained economic growth. These factors have contributed to the view that the economy is moving towards a “Goldilocks” scenario – a perfect balance between ebbing consumer prices and strong growth, which is seen as a healthy backdrop for stocks.
This positive view gained further traction when Chairman Jerome Powell assured that the Federal Reserve’s staff no longer forecasts a U.S. recession and expressed confidence in inflation returning to its 2% target without significant job losses. Policymakers also raised rates by 25 basis points at the central bank’s July 26 meeting, signaling a shift towards the confidence that the economy can sustain higher interest rates.
“The market has fully accepted the narrative that it wanted, which is Goldilocks. Until we see some set of data that scares them, it’s hard to see how that changes,” said Bob Kalman, senior portfolio manager at Miramar Capital, reflecting the sentiment of investors who have embraced the current economic conditions.
Investors also believe that the Federal Reserve is unlikely to deliver additional monetary policy tightening, as seen in the turbulent market conditions of the previous year. Futures markets now indicate a nearly 73% chance that interest rates will not rise above current levels through the end of the year, a significant increase from 24% just a month ago, according to CME’s FedWatch.
- CAD falls to 2-week low due to rate hikes impact.
- Christopher Nolan’s self-taught quantum physics knowledge imp...
- Top Travel Credit Cards – August 2023
Despite this optimism, the U.S. stock market faces an upcoming test as July’s employment numbers are released. Strong employment data has been a driving force behind this year’s stock rally, but if economic growth accelerates rapidly, there may be concerns that the Federal Reserve will need to raise rates beyond expectations.
“For markets to continue to trade higher, the soft landing must be a soft landing, not a reacceleration, because if housing and consumer spending accelerate from here, the Fed will have to raise rates a lot more,” wrote Torsten Slok, chief economist at Apollo Global Management, highlighting the delicate balance needed for sustained growth.
However, some experts, like Burns McKinney, senior portfolio manager at NJF Investment Group, are more cautious. McKinney has been diversifying his portfolio, adding dividend-paying positions in healthcare, financials, and energy with the expectation that large-cap stocks may falter. He believes the risk-reward ratio for megacap stocks is not as favorable as it was a quarter ago.
Meanwhile, the rally in tech stocks has been a major contributor to the overall market performance, driven in part by excitement over advancements in artificial intelligence. The tech-heavy Nasdaq 100 has surged nearly 44% year-to-date, with the S&P 500 information technology sector gaining nearly 46%. Positive forecasts from Meta Platforms and strong results from Alphabet have further justified the lofty valuations of these megacap tech companies.
However, some investors remain concerned about rising valuations. The S&P 500 tech sector now trades at 28.2 times forward earnings, compared to 19.6 at the beginning of the year. This has led investors like McKinney to look beyond tech stocks for further gains.
While many investors are optimistic, Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, believes a pause is on the horizon. He wouldn’t be surprised to see the S&P 500 fall by 5% or more in the next month or two as investors take profits on recent gains. However, Frederick remains positive about the market’s long-term recovery, stating that stocks are in the “early stages” of a sustained rebound after the bear market experienced last year.
In conclusion, despite lingering concerns about rising valuations and inflation, U.S. stock investors are encouraged by a resilient economy, positive outlook on monetary policy, and the potential for sustained growth in various sectors. The “Goldilocks” scenario and the reassurance from the Federal Reserve have bolstered market confidence. However, caution remains, with some investors diversifying their portfolios and looking beyond tech stocks for further gains. Whether the rally will continue or experience a pause in the coming months, the overall sentiment remains positive for a market on a trajectory of recovery.
Sources: – Reuters
