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It's going to be a long summer for the stock market

It's going to be a long summer for the stock market

 


  • The stock market is about to experience a few disappointing months.
  • Stocks are more likely to post flat or negative returns through the end of the year, two investment experts told BI.
  • Stock prices are already at record highs and there isn't much that could propel them further, they said.

This summer is shaping up to be a cruel one for investors, with the market likely to stagnate or undergo a correction in the coming months, predicted Wall Street veterans interviewed by Business Insider.

David Morrison, market analyst at Trade Nation, is dubious about the latest rally in stocks, with the S&P 500 and Dow Jones Industrial Average both closing in on record highs after a A fresher inflation figure in April.

The rally itself is problematic for stocks, he warned, because they are already so expensive that it's hard to imagine the market going higher from here. He estimates that the benchmark index will be subject to multiple sharp corrections of at least 10%, ending the year around 4,500.

“The next move will be down rather than up,” Morrison said.

This view puts him at odds with the growing number of bulls in the market who see a potential Federal Reserve rate cut as a powerful positive catalyst.

However, Morrison believes the Fed's first rate cut could easily be delayed for another three months, meaning there would be no reduction this summer, or even no reduction this year. All it would take is one high inflation number to completely dash the prospect of a Fed rate cut this year, he said.

“Investors are suffering from a large dose of FOMO, and I fear we are in for an explosion with echoes of the movements seen at the start of 2020,” Morrison told BI, highlighting the pandemic stock market crash. “I think the air here is pretty thin. While there's no obvious catalyst for a selloff, it's hard to discern what could help drive shares much higher from here .”

Will McGough, chief investment officer at Prime Capital Investment Advisors, believes the S&P 500 will end the year virtually unchanged from its current price. Stocks are already very expensive and the Fed has no urgent need to lower interest rates. Rates have hovered between 4 and 5 percent in the past without causing a recession, he noted.

“It allows everyone to get used to the way things should be rather than how they have been,” he said of interest rates, suggesting that sharp cuts rates are not possible.

Investors also face a host of hurdles in the second half that will keep stocks from moving higher, Morrison and McGough both warned.

The US economy faces a reasonable risk of recession over the next year, Morrison said. He estimates the chances of a hard landing at around 60%, much like the New York Fed, which forecasts a 50% chance that the economy will fall into a slowdown in the next 12 months.

A number of recession indicators have already sounded the alarm for the US economy. The 2-10 Treasury yield curve, the bond market yield curve notoriously accurate recession indicatorhas been reversing since July 2022, which is one of the main indicators that a recession is approaching, Morrison said.

Economic growth is already starting to slow. GDP slowed to just 1.6% in the first quarter, while key sectors of the economy, like manufacturinghave been contracting for months.

“I think it's going to get a lot more difficult as we go forward. And I think we should also prepare to see some massive, aggressive selling down the road,” Morrison said.

Although McGough believes a recession is unlikely, he anticipates greater volatility in the second half of the year, particularly as the November presidential election approaches.

“Political volatility will, in itself, trip over stock market volatility,” McGough warned.

Other strategists also warned of a rocky path ahead for stocks. More extreme forecasters have predicted a stock market crash of up to 65%, with stocks mirroring previous bubbles.

“Have fun this summer. You'll probably come back without the equipment moving one way or the other,” McGough said.

Sources

1/ https://Google.com/

2/ https://markets.businessinsider.com/news/stocks/stock-market-recession-outlook-sp500-correction-inflation-fed-rate-cuts-2024-5

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