daniel chigunwe
Wall Street Whispers with Isaac Jonas
This month, global markets have been characterised by significant volatility, primarily driven by fears of a recession, expectations around the Federal Reserve’s monetary policy decisions, and the looming United States (US) election.
September started with the market going red mostly because of sell-offs on the possibility of a recession. With more data coming up in the US and the upcoming Federal Open Market Committee (FOMC) next week, most analysts and investors are expecting a rate cut. The fear is that, if the rate cut is perceived by investors and traders as too aggressive, it might signal a worse economic situation than they expected.
Also the upcoming US election is another worry on the minds of most investors.
Typically, election season in the US comes with elevated market volatilities. If the past is to go by, historically, according to the Morgan and Stanley report with data covering between 1928-2016, the S&P 500 Index (SPX) has returned an average of 11,28 percent in all election years.
The SPX, on average, has also gone up 15,3 percent if a Republican was elected and 7,6 percent for a Democrat elected president.
Below, I summarise the major highlights in the US, and global markets.
United States
Market performance: Following a tumultuous week, US stocks showed signs of recovery. The Dow Jones Industrial Average (DJI), SPX, and Nasdaq (IXIC) each recorded gains of around 1,2 percent as reported on September 10, 2024.
This recovery came after a significant sell-off triggered by weaker-than-expected jobs and manufacturing data the previous week.
Economic indicators: The August jobs report was less robust than anticipated, contributing to market volatility. This data, combined with manufacturing reports, raised concerns about economic growth, leading to a sharp decline in major indices.
The SPX saw its worst weekly performance since March 2023, dropping by 4,25 percent, while the Nasdaq fell by 5,8 percent, marking its worst week since early 2022.
Interest rates and bond yields: There was a notable shift in the yield curve, with the 2-year Treasury yield falling below the 10-year yield, ending a prolonged period of yield curve inversion.
This change might signal expectations of less aggressive rate hikes or even rate cuts by the Federal Reserve, influenced by economic data. The FOMC is scheduled to meet on September 17-18 culminating on a rate decision on the 18th. Currently the Feds Fund rate is set on the target range of 5,25 percent – 5,50 percent.
Global Markets
Tech sector impact: The tech sector experienced significant volatility, with companies like NVIDIA facing a substantial drop due to market dynamics and regulatory concerns, which contributed to broader market declines.
In Europe, Apple lost a court case to the European Union’s top court which upheld that it should pay 13 billion euros in back taxes to Ireland, and also upheld a 2,4-billion-euro antitrust fine levied at Alphabet’s.
Google and Oracle shares were up on Tuesday. Oracle’s shares went up 11 percent on Tuesday on the backdrop of better-than-expected quarterly results and a partnership with Amazon’s cloud business.
Market sentiment: Globally, there was a risk-off sentiment, influenced by US market movements and economic indicators. Markets also seem cautious going into the US presidential debates between Harris and Trump. However, by the end of the week, there were signs of stabilisation, possibly due to bargain hunting or reassessment of economic forecasts.
Important upcoming economic data: Next week, Core Retail Sales and Retail Sales for August will give insights into the sector performance for August. Most importantly, the FOMC will meet to decide on the US Fed Fund rates. Most analysts are expecting a rate cut.
An aggressive rate cut could potentially signal how bad the Fed is behind the policy curve and hence a market crash could be a big possibility in that scenario. An unlikely scenario could be a no rate cut.
Hence, the Fed will have to walk a very fine line and maintain a delicate balance on the extent of the rate cuts, if at all. Next Thursday, Initial Jobless Claims and Existing Homes Sales for August will be published. These data will give a glimpse of the state of the economy in their respective sectors.
Key takeaways
Recovery signs: Despite a rough start, the week ended with a recovery in US stock indices, indicating that investors might be finding value in the dip or adjusting expectations based on recent economic data.
Economic concerns: The market’s reaction to job and manufacturing data underscores ongoing concerns about economic health, particularly around inflation, employment, and the potential for a recession.
Interest rate expectations: The uninversion of the yield curve could suggest a shift in market expectations towards a less hawkish Federal Reserve policy, potentially impacting investment strategies across various asset classes. If the Fed cut rates on the next FOMC meeting, short of a market crash, most money could rotate into the interest sensitive small to medium sized stocks within the Russell 2000 Index.
Investor and trader strategies: Given the volatility, investors are navigating through a period where traditional asset correlations might not apply, leading to cautious or speculative trading strategies.
The anticipation of Fed actions, alongside global economic indicators, upcoming US presidential elections is driving short-term market movements. I am trading carefully. Till next time, may the markets be on your side!
Bongani Ndlovu