The 1-Minute Market Report September 4, 2023
The S&P 500 had a good week, rising 2.5% and coming 1.6% below the 2023 high-water mark set in July; however, there is a possibility of a recession if the Fed keeps rates high for longer than necessary.
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Posted 9/4/2023, 8:30:00 AM
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After a strong surge in June and July, the S&P 500 index has experienced a significant decline in August, with tech stocks being hit particularly hard, as fears of rising interest rates and a slowdown in China weigh on the market.
The majority of economists polled by Reuters predict that the U.S. Federal Reserve will not raise interest rates again, and they expect the central bank to wait until at least the end of March before cutting them, as the probability of a recession within a year falls to its lowest level since September 2022.
The S&P 500 Index reached a high in July but has since experienced a pullback of -4.8% in the first three weeks of August, with further downside possible, although the market may be near a turning point.
A stock market rally is expected in the near term, as recent market corrections have created potential opportunities for investors to increase equity exposure, despite the possibility of a 5-10% correction still lingering. Additionally, analysis suggests that sectors such as Utilities, Staples, Real Estate, Financials, and Bonds, which have underperformed in 2023, could present decent upside potential in 2024, particularly if there is a Federal Reserve rate-cutting cycle.
The S&P 500 has fallen nearly 5% in August, and opinions on whether stocks will rebound are divided among Wall Street firms and market commentators, with some, like Goldman Sachs and Fundstrat, remaining optimistic while others, including Michael Burry and David Rosenberg, are bearish.
The Dow and S&P 500 ended slightly lower due to concerns about the Federal Reserve keeping interest rates higher for longer, while the Nasdaq finished barely in the green; the financial sector fell 0.9%, dragged down by an S&P downgrade of credit ratings of regional U.S. lenders, and investors are awaiting clarity on the rate outlook from Fed Chair Jerome Powell.
The S&P 500 is showing signs of a new bull market, but some experts are cautious and want to wait until the index reaches its previous high, meanwhile, there are two stocks, Sea Limited and Upstart Holdings, that have the potential to more than double in value over the next 12 to 18 months based on analysts' price targets.
Despite the optimism from some economists and Wall Street experts, economist Oren Klachkin believes that elevated interest rates, restrictive Federal Reserve policy, and tight lending standards will lead to a mild recession in late 2023 due to decreased consumer spending and slow hiring, although he acknowledges that the definition of a recession may not be met due to some industries thriving while others struggle.
The S&P 500 has recovered 65% of last year's bear-market drop, but when adjusted for inflation it is only about 45%, highlighting the diminished buying power and implying implications for the economy and future Federal Reserve policy.
The S&P 500 is close to reaching a record high, signaling the upcoming arrival of a new U.S. bull market, and investors should consider buying stocks like Roku and Datadog that have strong growth potential.
Wharton professor Jeremy Siegel predicts that the stock market will continue to rise into the end of the year, with the S&P 500 potentially surging 25% and gaining an additional 9% if the Federal Reserve acknowledges falling inflation and refrains from further interest rate hikes.
The S&P 500 has rallied in 2023 due to factors such as cooling inflation, a strong economy, and a positive outlook for earnings, but concerns over credit market volatility, monetary policy uncertainty, and steep valuations pose risks to the bull market rally.
Investors are unsure if the correction in the US stock market is over, as the possibility of a head-and-shoulders top on the S&P 500 is being discussed, although it is still uncertain if the consolidation will continue higher or lead to a downward trend.
Last week in the stock market resembled a game of punchball, with alternating positive and negative days, but overall the S&P 500 showed a descent of less than 4% over four weeks.
The S&P 500 could experience significant gains in the coming months following the end of the current rate hike cycle by the Federal Reserve, with historical data showing positive returns after previous cycles and strong economic indicators supporting this trend. Investors are advised to consider investing in an S&P 500 index fund or industry-leading stocks like Amazon.
The fundamentals and technicals support a demographically driven bull market in stocks until 2034, but potential risks include inflation, interest rate-induced debt crisis, and refinancing problems, which could lead to a drop in the stock market. Comparing the S&P 500's score in August 2023 to historical patterns, the market seems confident and not indicating an imminent debt crisis or severe recession. Credit spreads also appear tame compared to previous crisis periods. However, the article notes the possibility of abrupt changes in the market and encourages openness to a wide range of outcomes.
The S&P500 rose on Wednesday, supported by signs of weakness in the labor market and slower economic growth, reinforcing expectations of a Federal Reserve pause next month.
Job growth in the US slowed in August, signaling the impact of high interest rates, which has given traders hope that the Federal Reserve might pause hikes; US stocks rallied on the news, with the S&P 500 on a four-day winning streak and regaining some of August's losses.
Stocks are expected to rally next month, with the S&P 500 potentially reaching its previous highs, according to Fundstrat's Tom Lee, who cited reasons such as a cooling economy, no further interest rate hikes from the Fed, overly bearish sentiment in August, and historically strong performance in September.
Despite economic challenges, the S&P 500 is expected to continue its strong growth, potentially increasing by as much as 11% as the summer season ends, driven by companies like Apple, Microsoft, Google, Amazon, Nvidia, Tesla, and Meta, according to Morgan Stanley analyst Andrew Slimmon.
The S&P 500 ended lower and the Nasdaq higher as U.S. inflation data met expectations, signaling a potential pause in monetary tightening by the Federal Reserve, while Salesforce shares climbed following a positive revenue forecast.
Wall Street ended a challenging August on a mixed note, with the Dow Jones down 0.5%, the S&P 500 losing 0.16%, and the Nasdaq gaining 0.11%, resulting in the worst monthly performance since earlier this year; however, signs of a soft landing for the US economy and lower jobless claims have sparked hopes that the Fed may ease off on interest rate hikes at its upcoming meeting.
The stock market could reach record highs by the end of the year, as historical data suggests positive returns when stocks are up 10%-20% heading into September, according to Bank of America.
The S&P 500 rally is expected to fade as economic data supports a higher for longer monetary policy, with weaker job opening data and ADP job report sending rates down and a strong job report and ISM data pushing rates higher, creating challenges for the stock market as financial conditions tighten and leading to lower levels.
Bank of America's technical strategist believes that despite historically poor September performance, the S&P 500's year-to-date rally positions it for further gains, with the potential for an 8% climb by the end of the year.
The S&P 500 Index experienced its best week since June, while Bitcoin faced a marginal loss due to the delay of spot Bitcoin exchange-traded fund applications by the Securities and Exchange Commission, although analysts remain optimistic about future ETF approvals.
The S&P 500 index is unlikely to reach a record high by the end of 2023 due to factors such as earnings per share and financial conditions, according to Stifel's chief equity strategist.
The US economy is predicted to enter a recession by spring, leading to a 25% or more crash in the S&P 500, according to economist David Rosenberg, who warns that American consumers are nearing their spending limits and rising home prices reflect a weak housing market.
Investors are becoming increasingly nervous due to concerns about the Fed potentially increasing interest rates, as well as rising 10-year interest rates and the VIX, which may put pressure on stocks; however, there are also positive factors emerging, such as improving S&P 500 profit estimates and a shift away from data dependence by Fed officials, which suggests a better finish to September is probable.
John Hussman warns that stocks are overvalued and investors buying into the S&P 500 now are likely to experience abysmal returns for the next decade. He cites high valuations and poor investor sentiment as indications of a forthcoming steep sell-off, and predicts an annualized return of -4% over the next 12 years.
Summary: The Nasdaq and S&P 500 closed slightly higher on Friday after a week of losses, while the Dow Jones Industrial Average rose 0.2%; however, all three major indexes ended the week lower due to rising oil prices, stronger-than-expected labor market data, and China's iPhone ban.
Bitcoin's weak performance and its potential "double top" structure raise concerns of more downside, with predictions of new local lows; however, there are indications that Bitcoin may experience a major shakeout before rebounding to "fair value" and the 200-week EMA near $25,600 may offer some optimism; debate ensues over the possibility of Bitcoin filling the $20,000 CME futures gap; liquidity levels on BTC/USD markets continue to increase, adding to bearish predictions; ahead of the Federal Reserve meeting, the United States Consumer Price Index (CPI) data release on September 14 brings potential volatility to the market and may impact crypto market expectations.
Stocks are expected to open the week higher, with the S&P 500 up 0.5% in premarket trading, as investors look ahead to key U.S. economic data and show interest in companies such as Lennar, Arm, Tesla, and Oracle.
The US economy is facing a looming recession, with weakness in certain sectors, but investors should not expect a significant number of interest-rate cuts next year, according to Liz Ann Sonders, the chief investment strategist at Charles Schwab. She points out that leading indicators have severely deteriorated, indicating trouble ahead, and predicts a full-blown recession as the most likely outcome. Despite this, the stock market has been defying rate increases and performing well.
Despite the pressure on the market, the major US equity indexes have held steady near their recent highs, with the S&P 500 up 16.21% year to date and the Nasdaq Composite up 31.6%, raising questions about whether the current market weakness is due to seasonality or potentially something more significant like inflation.
Despite its high valuation, a strategist predicts that the S&P 500 can still continue to rise.
The S&P 500 is unlikely to experience a similar rally to the one seen 11 months ago despite the increase in U.S. consumer price inflation, according to chief market technician Jonathan Krinsky.
The Federal Reserve Bank of New York's recession probability tool, which examines the difference in yield between the 10-year U.S. Treasury bond and three-month bill, suggests a 60.83% probability of a U.S. recession through August 2024, indicating that stocks may move lower in the coming months and quarters. However, historical data shows that U.S. recessions are typically short-lived, and long-term investors have little to worry about.
Economist Gary Shilling predicts that the S&P 500 will decline by around 40% during this market cycle, citing recession indicators such as the yield curve and The Conference Board's Leading Economic Index. He believes that a US recession may already be underway due to the Federal Reserve's focus on reducing inflation, and high valuations in the stock market increase the likelihood of a significant drop.
The S&P 500 and Nasdaq ended the week slightly lower due to a decline on Friday caused by higher bond yields and oil prices, while the Dow Jones Industrial Average saw a small weekly gain.
Bank of America predicts that the S&P 500 could surge over 25% within the next year based on a bullish indicator, with low long-term profit growth expectations among analysts signaling potential gains.
Wall Street finished the week with a decline in stocks, as the S&P 500 posted its second consecutive losing week, with technology and retail sectors contributing to the slide, while investors await the upcoming Federal Reserve interest rate policy meeting.
The stock market has been strong in 2023, but there are still bargains available, such as Block and Safehold, which are slightly above their 52-week lows.
The Federal Reserve has paused raising interest rates and projects that the US will not experience a recession until at least 2027, citing improvement in the economy and a "very smooth landing," though there are still potential risks such as surging oil prices, an auto worker strike, and the threat of a government shutdown.