Flaring economic worries threaten US stocks rally
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[August 02, 2024] By
Lewis Krauskopf
NEW YORK (Reuters) - Economic concerns are once again showing up on Wall
Street's radar, as worries grow that months of elevated interest rates
may be starting to hurt U.S. growth.
For months, investors had been heartened by cooling inflation and
gradually slowing employment, believing they bolstered the case for the
Fed to begin cutting interest rates.
Now that a September rate cut has come into view following a Fed meeting
earlier this week, investors are worried that the central bank may have
left rates at restrictive levels for too long, allowing them to take a
toll on economic growth.
Evidence of such a shift in thinking came on Thursday, when data showing
weakness in the labor market and manufacturing sector sparked a sharp
selloff in U.S. equities, with investors dumping everything from chip
stocks to industrials while piling into defensive plays. Richly valued
tech stocks tumbled, extending losses in the Nasdaq Composite to nearly
8% from a record closing high reached in July.
"The narrative has been that rate cuts are just because inflation is
coming closer to the 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
exacerbate worries if they show further signs of weakness.
Next week brings earnings from industrial bellwether Caterpillar and
media and entertainment giant Walt Disney, which will give more insight
into the health of the consumer and manufacturing, as well as reports
from healthcare heavyweights such as weight-loss drugmaker Eli Lilly.
Bets in the futures markets on Thursday suggested growing unease about
the economy. Fed fund futures reflected traders pricing in an over 25%
chance of a 50-basis point cut at the central bank’s September meeting,
double the odds from a day before, according to CME FedWatch. Futures
priced a total of 85 basis points in rate cuts in 2024, compared to just
over 60 basis points priced in on Wednesday.
"The comfort that (the market) took yesterday in feeling that the Fed
was on track for a September rate cut has switched to the reality that
there is a lot of time between now and that September meeting," said
Yung-Yu Ma, chief investment officer at BMO Wealth Management.
Broader markets also showed signs of unease. The Cboe Volatility index -
known as Wall Street’s fear gauge - stands near a three-month high as
demand for options protection against a stock market selloff rose.
Worries over fresh turmoil in the Middle East also contributed to
investor nervousness.
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A Wall St. sign is seen outside the New York Stock Exchange (NYSE)
in the financial district in New York City, U.S., March 2, 2020.
REUTERS/Brendan McDermid/File Photo
Meanwhile, investors have shown a preference for sectors such as
utilities and healthcare - popular options during times of economic
uncertainty.
Options data for the Health Care Select Sector SPDR Fund showed the
average daily balance between put and call contracts over the last
month at its most bullish in about three years, according to a
Reuters analysis of Trade Alert data.
Trading in the options on Utilities Select Sector SPDR Fund also
shows a pullback in defensive positioning, highlighting traders'
expectations for strength for the sector.
The healthcare sector is up 4% in the past month, while utilities
are up over 9%. By contrast, the Philadelphia SE Semiconductor index
is down 11% in that period amid sharp losses in investor favorites
such as Nvidia and Broadcom.
To be sure, some investors said the data could just be an excuse to
lock in profits after the market's overall strong run in 2024.
“What you’re seeing now, and you’d probably see it for the next
month or two, is some kind of consolidation and sideways price
action," said Bill Strazzullo, chief market strategist at Bell Curve
Trading. "The bigger picture bull trend is intact."
Investors will have more earnings reports to chew over in the weeks
ahead, including Nvidia at the end of the month, while the U.S.
presidential race could add to 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
becomes bad for corporate earnings," said Burns McKinney, a
portfolio manager at NFJ. "The Fed has almost been like a surfer
riding a wave and 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)
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