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Stock market threatened by triple whammy as S&P 500, Nasdaq and Dow Jones near record highs
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Stock markets are in full euphoria following the explosive remarks of the Fed chairman.
In his recent testimony before Congress, Fed Chairman Jerome Powell admitted that the labor market, a driver of inflation that the Fed pays close attention to, is no longer a concern.
“The labor market appears to be fully rebalanced,” Federal Reserve Chairman Jerome Powell said Tuesday at a congressional hearing, adding that the labor market was no longer “a source of broad-based inflationary pressures for the economy.”
This is a major change from the past three years, when Powell used the tightening labor market as an excuse to keep rates high for longer.
Now that the Fed's biggest headache is over, the S&P 500, Nasdaq and Dow are returning to all-time highs, signaling an imminent rate cut.
According to CME FedWatch, a tool that assesses the probabilities of rate cuts based on futures markets, there is a 93.3% chance that interest rates will remain at their current level at the July meeting.
However, the probability of a rate cut rises to a near certainty, 95%, for the next FOMC meeting in September.
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Economists agree that the Fed is preparing for a rate cut. “It seems like they are open to the idea of easing monetary policy, but that needs to be confirmed by the data,” said James Knightley, ING’s chief international economist.
Not so fast…
Bill Blain, a market strategist at Shard Capitals, disagrees.
According to him, the stock market is facing a triple threat: overvaluation due to euphoria, a lack of understanding of economic reality and political factors.
Although markets appear unstoppable for now, Blain believes a reversion to the mean is imminent, with potential triggers being one or a combination of three forces.
The first is what Blain calls behavioral psychosis, which has propelled U.S. stock prices to extremes relative to other markets.
U.S. stocks are valued much higher than those in Europe, emerging markets, or China. China has some of the largest potential markets, such as health care, on the planet, but who wants to risk the furor that would come with being seen investing in the Middle Kingdom these days? Blain wrote.
The second concern is the uncertainty surrounding the US presidential election.
The election period could be very volatile. How damaging could a Democratic coup against Biden be? How distracting could rumors that he has Parkinson’s disease be? What will happen to U.S. markets if the election remains too close and Biden actually manages to recover? Blain wrote.
The strategist also warns of what he calls the “new normal,” referring to interest rates settling at 5%.
Central banks and regulators want normalized interest rates, not monetary and market distortions created by artificially low interest rates, he said.
Although politicians are calling for lower rates to win votes, he believes central bankers will do their best to keep rates higher to avoid the unintended long-term consequences of artificially low rates.
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Sources 2/ https://www.forbes.com/sites/danrunkevicius/2024/07/15/the-stock-market-faces-triple-whammy-threat-as-sp-500-nasdaq-dow-hover-near-record-highs/ The mention sources can contact us to remove/changing this article |
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