Maybe not. Even if the Fed skips raising rates at its June 13-14 meeting and chooses to pause to give the benchmark 5% rates more time to slow the economy and reduce inflation, stocks and bonds still face many challenges.
“I’m firmly neutral on our equity outlook,” said Elizabeth Burton, chief investment strategist for client solutions and capital markets at Goldman Sachs Asset Management, in a phone interview Friday.
“Our forecast remains at 4,000 on the S&P 500, down about 6.5% from current levels.”
Burton cited negative inflows for equity funds this year, with investors instead favoring fixed-income investments with the highest returns in years, as a major reason for her firm stance on stocks this year, but also negative earnings growth and other headwinds she expects to continue. this year.
“I think the stakes aren’t over yet,” Burton said. In addition to the ever-high inflation and pressure on commercial real estate from tightening credit, there is also a potential liquidity drain in store as the Treasury unleashes billing to reload its coffers depleted by the debt-ceiling battle.
In addition, the craze around artificial intelligence has more than a full grip on the companies responsible for most of the recent gains in the stock market.
“If you were running a dog biscuit company, and you said you were integrating AI, you might get a boost for your inventory,” she said.
be seen: Nasdaq outperforms the Dow in May by the widest margin since the dot-com crash as ‘magnificent seven’ stocks rally
Debt ceiling remnants
Congress voted on Thursday to leave the US debt ceiling unset for two years, ruling out the risk of default and disaster in global financial markets for the time being.
But there is still as much as $1 trillion in Treasury issues looming this summer as a potential problem for the markets.
Mom and Pop could be thrilled with 5.4% on the 3-month Treasury note
Instead of leaving the cash hanging in a bank savings account. The trade-off is higher rates mean companies no longer have access to extremely cheap debt to buy back shares.
This also means a greater burden on the US government to service the low-interest debt that is due. The Congressional Budget Office projected in May that interest costs on the public debt would reach $645 billion this year and reach $1.4 trillion in 2033.
“The debt ceiling has been the gift that keeps giving for a while,” Gennady Goldberg, US interest rate analyst at TD Securities, told MarketWatch.
“It would be a record amount for billing outside of a crisis,” he said, adding that he expected the Treasury Department to look to bring its cash balance back to about $600 billion within a few months.
A growing concern is that the outflow of supplies could drain reserves from the financial system, particularly shocking markets to the point of forcing the Federal Reserve to end its balance sheet reduction program early.
“The reserves are really worth watching,” Goldberg said. “They are really what keeps the financial system going.”
Pause, cut, maybe
It is difficult to say what to make of this economy. The job market is still very strong, and stocks are rising, but inflation is still stuck above the Fed’s annual 2% target.
“There is a fair amount of evidence that things are slowing, and will continue to slow, which could prompt a pause” on the Fed’s rate hikes, said Eric Stein, chief investment officer for fixed income at Morgan Stanley Investment Management. .
“We have 500 basis points of tightening in about 15 months,” he said. That’s a lot of stress, and it’s going to take time to work through the system.”
So what is the position of the markets? It depends on where you look for the answers. “The stock market seems to be saying the economy is doing well,” Stein said. But he said an inverted Treasury yield curve also warns of a recession, as bond market investors expect to use at least some rate cuts to prop up a faltering economy.
If that happens, the 10-year Treasury yield
3.7% as of Friday, locked in for a decade, looks more attractive than its 1.5% return during the lows seen during the pandemic.
S&P 500 index
It made a rally out of bear territory on Friday, but missed a lot to close above the 4292 level needed to meet the widely used definition of an exit, which requires a 20% close above the bottom of the bear market close. It ended the week up 1.8% at 4,282.
Dow Jones Industrial Average
It rose 701 points on Friday, adding to its weekly gain of 2%, while the Nasdaq Composite rose.
It gained 1.1% on Friday, for a weekly advance of 2%, according to FactSet.
US economic data for the week ahead includes manufacturing and services data on Monday, trade deficit and consumer credit data on Wednesday and weekly jobless claims on Thursday.
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