• Savings Directions
• November 9, 2024

US Bull Market Enters a Volatile Phase

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The Federal Reserve's recent decision to raise interest rates by 25 basis points has stirred economic discussions across various sectorsFollowing the announcement, interest rates have reached a range of 5.25% to 5.5%, marking the highest median level observed in twenty-two yearsThis hike represents the eleventh increase in the last twelve meetings, showcasing a continued trend of monetary tightening that has become characteristic of the Fed's current policy strategy.

Upon announcing the decision, Fed Chair Jerome Powell adopted a cautious tone, which seemed to reflect the central bank’s delicate balancing actHe downplayed the possibility of interest rate cuts later this year, suggesting that any future adjustments would be heavily dependent on incoming economic dataThis lack of clarity left many market participants speculating whether another hike could occur in September, or conversely, if rates might remain static

It emphasized the Fed's analytical approach toward any shifts in monetary policy, as they tread carefully amid robust economic indicators coupled with persistent inflation.

Despite Powell's dovish remarks, the underlying sentiment in the markets appears to lean towards the belief that this could be the concluding hike of the current cycle, with speculations of approximately 125 basis points of cuts emitting from traders for the upcoming yearRecent fluctuations in the stock market—particularly in the tech sector with mixed quarterly earnings from industry giants such as Tesla, Meta, Microsoft, and Alphabet—underscore the volatility in response to macroeconomic changes.

As the market adjusts to this environment, a pivotal observation is the ambivalence surrounding the Fed's stance on potential future rate hikesTraders who sought clearer guidance from the latest monetary policy statement found little encouragement

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The only notable modification was a linguistic shift in describing economic activity as expanding at a ‘moderate’ pace rather than a ‘measured’ oneThese slight adjustments suggest the Fed may be trying to ease inflamed market expectations while still maintaining its core message of fiscal restraint.

Powell has emphasized the current interest rates are positioned in a restrictive zone, with real rates surpassing what is considered neutralHe has cautioned that, should inflation continue on a downward trajectory, rates could revert to neutral or belowHowever, the road ahead remains rocky; many believe that a pause in rate cuts could extend well into the first half of 2024, contingent on inflation metricsIn May, the Personal Consumption Expenditures (PCE) index expanded by 3.8%, with projections hinting it could decline to around 3% later this year.

Consolidating these factors hints at a scenario where the Fed could keep rates elevated for an extended period

Predictive models point out that forecasting a September rate change could be premature, given the multitude of critical economic reports set to be released, including the Consumer Price Index (CPI) and various employment statisticsAdditionally, current inflation, while easing, still surpasses the Fed's 2% target, and elevated commodity prices—especially concerning energy and food—threaten the stability that many forecasted.

In the context of geopolitical tensions affecting supply chains and commodity prices, the market's anticipations of inflation may also be driven by these external factorsRecent increases in oil prices have seen Brent crude breach notable resistance levels, suggesting that traders expect continued upward momentum amid fears that supply may become increasingly compromised due to conflicts impacting agricultural outputs such as corn and wheat.

Amidst these fluctuations, the Fed remains steadfast in its commitment to achieving the 2% inflation target

However, they face headwinds from stubborn wage inflation and lingering challenges within the housing sectorWhile housing indices have shown signs of cooling, the struggle to maintain balance in the face of constrained housing supply complicates matters, especially as consumer confidence begins to rebound.

In terms of currency, the dollar index has struggled to maintain its strength, evidenced by a round of downward corrections recently observedThe dollar index encountered strong resistance at key moving averages, complicating efforts to maintain upward momentumSequentially, the attention shifts to the European Central Bank’s (ECB) ability to uphold a hawkish stance, especially when juxtaposed with the Fed’s actions.

On the same day the Fed raised rates, the ECB also implemented a 25 basis point increase, yet its narrative hinted at the uncertainty plaguing the Eurozone's economic stability

Chair Christine Lagarde articulated that inflation's downward trajectory remains precarious, exacerbated by geopolitical tensions that heighten trade disruptions and price pressures on essential commoditiesSimultaneously, the euro has dipped against the dollar as the region wrestles with the dual burdens of high inflation and the looming threat of recession.

With European inflation declining from last year’s peaks, disparities exist across member states, creating a fragmented economic recoveryWhile Spain’s inflation stood at a nimble 1.9%, countries like the Czech Republic reported rates as high as 9.7%. Lagarde warned of potential price spikes stemming from heightened geopolitical tensions, adding complexities to the already unpredictable economic environmentMoreover, the ramifications of Russia’s withdrawal from vital grain initiatives evoke further uncertainty in agricultural commodity markets, potentially escalating food prices and consequently feeding into inflation estimates.

In the realm of commodities, gold has experienced fluctuations of its own

For bullish investors, a key resistance level stands at $1,987, a threshold that, if breached, could lead to a challenge of the $2,000 markConversely, should $1,950 yield as a critical support area, we may witness a retreat towards $1,940, should bearish trends gain ground.

A pivotal development in U.Sequity markets sees heightened volatility as tech earnings season unfoldsThe Nasdaq 100 and S&P 500 indices have enjoyed notable returns so far this year—approximately 41% and 18%, respectively—primarily driven by mega-cap technology firmsHowever, this concentrated recovery raises considerable risk about vulnerabilities if certain stocks experience corrections, influenced by changing investor sentiment.

Despite the bullish trends witnessed, market valuations remain high, with the S&P 500's price-to-earnings ratio surged from 18 to 20, amidst an increase in government bond yields

Typically, a rise in real rates would apply downward pressure on valuations; hence, the persistent expansion in the markets poses a latent riskThe current environment contrasts sharply with 2022's corrections, where tightening monetary policy coupled with rising yields particularly negatively impacted valuations.

Amid mixed earnings reports from major tech players, the focus remains sharply on forthcoming results that may sway market sentiments furtherAfter Netflix reported a decline in subscribers while Tesla experienced a sharp correction, the impact of these outcomes has been significant, with questions remaining about the sustainability of their respective growth rates amidst rising costs and competitive pressuresAlphabet, conversely, has impressed with sound earnings driven by robust cloud and advertising performance, yet concerns linger about the future influence of AI and operational costs on core revenues.

The S&P 500 now trades near its long-term resistance levels, with critical support just below current trading ranges indicating a tussle between bullish and bearish traders as they navigate these rapidly shifting economic conditions