Gloomy Outlook for U.S. Stocks : 4 Negative Clouds Loom
The three major U.S. stock market indexes closed lower on Friday, the 22nd, concluding a dismal week. Both the S&P 500 and Nasdaq recorded their largest weekly declines since March and have now fallen for three consecutive weeks.
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Both indices recorded their most substantial weekly declines since March, extending a three-week losing streak. The primary culprit behind this downward spiral is the Federal Reserve’s increasingly hawkish stance, signaling a prolonged period of higher interest rates.
This, coupled with surging government bond yields and the looming threat of a U.S. government shutdown, has sent shockwaves through the investment community.
On the closing bell of Friday the 22nd, the S&P 500 Index and the Nasdaq Composite Index posted declines of 0.2% and 0.1%, respectively.
These modest daily losses, however, were overshadowed by their significant weekly setbacks, with the S&P 500 shedding 2.9% and the Nasdaq plummeting 3.6%—their most significant declines since March. The Dow Jones Industrial Average was also not spared, marking a 1.9% drop for the week.
But amid this sea of red, there was a glimmer of hope. The news of an economic and financial working group being established between the United States and China ignited a rally among Chinese concept stocks listed in the U.S., surging 2.9% on Friday.
Additionally, the Philadelphia Semiconductor Index rebounded by 0.8%, and TSMC ADR experienced a marginal uptick of 0.3%, ending a five-day decline. However, despite this brief respite, Feiban and TSMC ADR still posted weekly losses of 3.2% and 4%, respectively.
The recent sharp decline in U.S. stocks coincided with a surge in bond yields, reminiscent of levels not witnessed since the financial crisis. The Fed’s dual message of continuing interest rate hikes for the remainder of this year and more moderate cuts in the following year only intensified market unease.
Friday brought statements from two Fed officials that hinted at the possibility of further interest rate hikes. Moreover, the officials suggested that elevated interest rates might be a prolonged necessity to counter rising inflation.
Boston Fed President Collins stated that further tightening would “certainly not be ruled out,” while Governor Bowman indicated that more than one interest rate hike might be required.
In response to these developments, the U.S. 10-year Treasury yield, after reaching a 16-year peak of 4.479% on Thursday, retraced slightly to 4.438% on Friday.
The underlying concern is that a stronger-than-anticipated economic growth trajectory could compel the Fed to persist with a restrictive monetary stance, potentially jeopardizing the achievement of a soft landing—a scenario that some, including Ball, view skeptically.
The S&P 500 index’s decline by over 4% this month has, unfortunately, adhered to the historical underperformance typically associated with September.
With October just around the corner, investors are left pondering whether a change in fortune awaits. The Stock Market Trading Almanac provides some encouragement, reporting that the S&P 500 has historically gained an average of 1% in October since 1950.
However, the situation remains challenging, as investors confront a barrage of negative developments. Beyond worries about the Fed’s high-interest rate policies fueling bond yield hikes, there are growing concerns about soaring oil prices, the resumption of student loan repayments in October, and the looming specter of a U.S. government shutdown.
If Congress fails to pass a budget before September 30, a government shutdown becomes increasingly likely.
Should a budget impasse materialize in Congress, it could result in further surges in bond yields, exacerbating the downward pressure on U.S. stocks, which have already been adversely affected by rising yields.
Strategists emphasize that there is a substantial pool of capital ready to enter the market in response to any significant dips. Keith Lerner, co-chief investment officer at Truist, suggested that buyers are poised to re-enter the market if the S&P 500 retreats to around 4,200—an additional 3% drop from Friday’s closing at 4,320.
In contrast to the weakness witnessed in U.S. stocks, the U.S. dollar index (DXY) maintains its strength. On the 22nd, it rose by 0.21%, reaching a six-month high at 105.583. The DXY’s weekly gain amounted to 0.3%, marking the tenth consecutive week of advances—a feat unmatched in the past decade.
MarketWatch has highlighted an intriguing development in the U.S. dollar index—an event referred to as a “golden cross.” This phenomenon occurs when the 50-day moving average surpasses the 200-day moving average, typically seen as a bullish signal by technical analysts, hinting at the potential for further market strength.
Such a shift in currency dynamics may exert additional pressure on U.S. stocks.
Conclusion:
The recent turmoil in U.S. stocks, spurred by the Federal Reserve’s policies, surging bond yields, and a host of economic factors, has left investors cautiously eyeing the market’s immediate future.
With October approaching, uncertainty prevails, and the market remains on edge, with many closely monitoring potential opportunities amid the fluctuations.
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