US Stock Market Rally in Doubt as Fed Raises Interest Rates Despite Deteriorating Fundamentals
Over the course of the last twelve months, due to rising inflation, the US central bank has increased rates from close to 0% to nearly 5%. When interest rates increase, it can slow down the rate of price increases by making it more expensive to borrow and incentivizing saving rather than spending or investing. However, they can also reduce demand and weaken economic growth.
Marko Kolanovic, a JPMorgan Chase & Co. strategist, said Monday he's “turning more defensive” on stocks – and recommends investors should fade the stock market rally of 2023 because “a recession is currently not priced into equity markets.” According to Kolanovic, there is only a “fairly limited” probability of the stock market increasing in value; he believes an economic downturn is likely to be required in order to bring inflation down to the Federal Reserve's 2% goal.
The S&P 500 and Nasdaq Composite have had a great beginning to the year, both increasing by 8% and 15%, respectively. This is mainly due to the sudden decrease in inflation. The US Department of Labor will release the January inflation report on Tuesday morning. Economists estimated that the consumer price index increased by 6.2% annually, which is a decrease from the 6.5% growth seen the month before. Experts believe that the Fed may have difficulty controlling inflation if more than that occurs, which could cause markets to become increasingly unstable.
Government data released on Friday showed that the US added 517,000 jobs in January, significantly exceeding the 185,000 nonfarm payrolls estimate from economists surveyed by Bloomberg. The US unemployment rate dropped to 3.4%, its lowest level in over half a century.
Despite deteriorating fundamentals, Wilson cautioned that the Federal Reserve is still increasing interest rates. In contrast to other times of economic decline that have occurred while the Federal Reserve was decreasing interest rates in order to safeguard the economy, Wilson noted that presently, the Fed is still increasing rates, with no estimate to begin reducing them until 2024 as indicated by the central bank's estimations.
Wilson believes that the S&P 500 could possibly drop to 3,500 points, which is the same level it was at in October. This would mean a 15% drop from its current value.
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3. “It's time to become defensive with stocks and ditch them for bonds because a recession is coming, says JPMorga” Business Insider India, 14 Feb. 2023, https://www.businessinsider.in/stock-market/news/its-time-to-become-defensive-with-stocks-and-ditch-them-for-bonds-because-a-recession-is-coming-says-jpmorgans-top-strategist/articleshow/97916616.cms
4. “Stock Market Just Made The ‘Same Mistake Again’—Here’s Why Experts Are Worried About The Latest Rally” Forbes, 13 Feb. 2023, https://www.forbes.com/sites/jonathanponciano/2023/02/13/stock-market-just-made-the-same-mistake-again-heres-why-experts-are-worried-about-the-latest-rally
5. “‘Underlying bullish tenor’: U.S. stocks fare surprisingly well as Treasury yields rise after hotter-than-expected inflation, says Morgan Stanley’s Andrew Slimmon” MarketWatch, 14 Feb. 2023, https://www.marketwatch.com/story/underlying-bullish-tenor-u-s-stocks-fare-surprisingly-well-as-treasury-yields-rise-after-hotter-than-expected-inflation-says-morgan-stanleys-andrew-slimmon-76c0299d
6. “‘Edge of a swamp’: JPMorgan strategist sees ‘one time only sale’ in fixed income as U.S. economy slows” MarketWatch, 7 Feb. 2023, https://www.marketwatch.com/story/edge-of-a-swamp-jpmorgan-strategist-sees-one-time-only-sale-in-fixed-income-as-u-s-economy-slows-11675774251
7. “Stock market poised for next leg lower as profits shrink, says Morgan Stanley's Mike Wilson” msnNOW, 6 Feb. 2023, https://www.msn.com/en-us/money/markets/stock-market-poised-for-next-leg-lower-as-profits-shrink-says-morgan-stanleys-mike-wilson/ar-AA17aOnc
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