Retail sales keep immigration hopes alive after fears of a recession
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Hopes of a softer economic recovery also powered US stocks higher, as upbeat data eased fears of a recession following a brutal sell-off earlier this month.
The S&P 500 has rallied more than 6% since Aug. 5, where the decline pushed the benchmark US index to its biggest three-day slide in two years. The quick return to calm was also reflected in the Cboe Volatility Index, or Wall Street’s “fear gauge,” which fell to its fastest pace in four years last week.
The turnaround was this week’s reports on retail sales, inflation and producer prices, which helped ease concerns about an economic slowdown sparked by weaker-than-expected employment data earlier in the month. The positive data bolstered the case for investors looking to bounce back amid the many commercial activities that have taken place this year, from buying Big Tech stocks to the latest bet on small and mid-caps that sped up in July.
“There was a real fear of growth emerging,” said Mona Mahajan, senior investment strategist at Edward Jones. “Since then, what we’ve seen is that the economic data has come out very well.”
Some of the big winners of 2024 have made strong rebounds since Aug. 5. Chipmaker Nvidia hit more than 20%, while the Philadelphia SE Semiconductor index gained more than 14%. Small-cap stocks, which were strong performers in July, have also recovered from recent declines, with the Russell 2000 up nearly 5%.
Meanwhile, traders are backing off bets that the Federal Reserve will need to deliver a sizeable rate cut in September to avoid a recession.
As of late Thursday, futures tied to the Fed funds rate showed traders pricing in a 25% chance the central bank will cut rates by 50 basis points in September, down from about 85% in Aug. 5, CME FedWatch data showed. The probability of a 25 basis point cut stands at 75%, in line with expectations that the Fed will begin an easing cycle in September.
“You can’t unequivocally say the situation is going to be tough, but there’s a lot of reason to believe that at this point the economic momentum is sufficiently sustainable,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
The Fed’s plans may become clearer next week when Chairman Jerome Powell speaks at the central bank’s annual economic policy conference in Jackson Hole, Wyoming.
“We think a key highlight of Powell’s speech will be an acknowledgment that progress in inflation is sufficient to allow the start of rate cuts,” economists at BNP Paribas said in a note on Thursday.
For the year, the S&P 500 is up more than 16% and is within about 2% of its longest July close.
Mahajan, of Edward Jones, expects the slowdown, combined with low interest rates, to help pave the way for more stocks to participate in the market rally, instead of the small number of megacaps that have led the indices to the top of most of these. a year.
Analysts at Capital Economics believe that the soft arrival of the US economy will support the enthusiasm for artificial intelligence that helped to drive the markets.
“Our end-2024 forecast for the S&P 500 remains at 6,000, driven by the assumption that the AI narrative that dominated the first half of the year will re-emerge,” they wrote. That target would be 8% from the closing level of the S&P 500 on Thursday.
The latest economic data, while reassuring, is far from clear for markets heading into September, which has been one of the most volatile times of the year. Investors will be keeping a close eye on Nvidia’s earnings at the end of the month, as well as another earnings report on September 6.
“There’s been some relief in the market, obviously,” said Quincy Krosby, chief global strategy officer at LPL Financial. “The question now is, will the next earnings report confirm what the market is currently expecting about soft landings.”
-Lewis Krauskopf, Reuters
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