{"id":24275,"date":"2023-06-18T13:02:07","date_gmt":"2023-06-18T17:02:07","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/summer-doldrums-in-stocks-put-to-the-test-as-doubts-linger-on-more-fed-rate-hikes\/"},"modified":"2023-06-18T13:02:08","modified_gmt":"2023-06-18T17:02:08","slug":"summer-doldrums-in-stocks-put-to-the-test-as-doubts-linger-on-more-fed-rate-hikes","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=24275","title":{"rendered":"\u2018Summer doldrums\u2019 in stocks put to the test as doubts linger on more Fed rate hikes"},"content":{"rendered":"
\n

Summer is traditionally regarded as a sluggish time for U.S. stocks, given the Wall Street adage: \u201cSell in May and go away.\u201d This year, though, may turn out to be markedly different from past years.<\/p>\n

One reason is bullish investors are steadfastly holding on to the view that U.S. inflation is set to fall by more than the Federal Reserve forecasts, and that\u2019s setting the stage for a possible showdown in the months ahead with policy makers, who want more interest-rate increases to push inflation back down to 2%. <\/p>\n

The S&P 500
\n SPX,
\n -0.37%<\/bg-quote>
\n and Nasdaq Composite
\n COMP,
\n -0.68%<\/bg-quote>
\n booked their longest streak of weekly advances in years on Friday, as equity investors largely brushed aside the Fed\u2019s guidance that it will likely be appropriate to lift its policy interest rate to around 5.6% by year-end from a current level between 5%-5.25%. Ultimately, it will be up to economic data to determine whether the market has gotten ahead of itself by thinking that the Fed won\u2019t have the nerve to deliver two more 2023 rate hikes.<\/p>\n

Read:<\/strong> Why the stock market shook off a \u2018Jekyll and Hyde\u2019 Fed meeting<\/p>\n

Chris\u00a0Zaccarelli, chief investment officer for Independent Advisor Alliance in Charlotte, N.C., which manages $10 billion in assets, said his firm believes that \u201cinflation is here to stay and risks becoming entrenched unless the Fed raises rates much more than the market is currently expecting.\u201d<\/p>\n

Theoretically, Zaccarelli said by phone, policy makers would need to raise rates by another 75 to 100 basis points \u2014 or more than the 50 basis points of hikes implied by policy makers\u2019 projections \u2014 to put inflation on a path toward 2%. However, he doesn\u2019t see that happening. Fed officials are \u201ctalking tough, but we don\u2019t think they will actually hike more than one more time, before holding rates steady above 5.25%-5.5% for six to 12 months.\u201d<\/p>\n

Since inflation began rising in 2021 after the onset of the pandemic, investors have repeatedly underestimated the Fed\u2019s willingness to tighten financial conditions or, at the very least, taken a while to get on board with the central bank\u2019s thinking. That\u2019s the case this time around, as well, with fed funds futures traders pricing in only a small chance of a quarter-of-a-percentage-point rate hike by the Fed in September, following a similar move in July. However, the Treasury market seemed to finally be absorbing the Fed\u2019s hawkish message on Friday, two days after it was delivered.<\/p>\n

Markets are caught in a somewhat complicated moment, in which there\u2019s plenty of disagreement over what lies ahead.<\/p>\n

Inflation has fallen from a 9.1% peak reached last June, as measured by the annual headline rate of the consumer price index, and is showing signs of further easing. Stocks are being buoyed by enthusiasm over the prospects for artificial intelligence and by big-name tech companies, like Nvidia Corp.
\n NVDA,
\n +0.09%<\/bg-quote>,<\/span>
\n Microsoft Corp.
\n MSFT,
\n -1.66%<\/bg-quote>,<\/span>
\n Meta Platforms Inc.
\n META,
\n -0.29%<\/bg-quote>,<\/span>
\n and Apple Inc.
\n AAPL,
\n -0.59%<\/bg-quote>.<\/span>
\n Finally, a much-talked about U.S. recession hasn\u2019t actually arrived, with labor-market strength keeping the unemployment rate at 3.7% as of May.<\/p>\n

Yield-seeking investors helped keep Treasury rates mostly contained between March and May, but the prospect of more Fed rate hikes by year-end has pushed the 2-year yield
\n TMUBMUSD02Y,
\n 4.720%<\/bg-quote>
\n to three-month highs in June. Meanwhile, the bond market is still pointing toward the likelihood of a U.S. economic downturn, as demonstrated by more than 40 different inverted Treasury yield spreads.<\/p>\n

The continued gap in expectations boils down to a fundamental difference between what markets appear to be wanting the Fed to do \u2014 which is put a quick end to its most aggressive rate-hike cycle in four decades \u2014 and what the Fed is duty-bound to do \u2014 keep hiking until inflation falls swiftly back to 2%. <\/p>\n

Data released over the past week shows one core gauge of the May consumer price index, which strip out food and energy to provide a purer read on inflation, at\u00a05.3% for the past 12 months versus 5.5% previously \u2014- much too high for the Fed\u2019s liking. Stock investors have instead focused on the annual headline CPI rate, which dropped to 4% last month: The S&P 500 and Nasdaq Composite respectively ended Friday with their longest weekly streak of advances since the five- and 10-week periods that ended on Nov. 5, 2021, and March 1, 2019.<\/p>\n

\u201cWe are at a stalemate between what the Fed wants to accomplish and what the economy will continue to do,\u201d said Zaccarelli of Independent Advisor Alliance. He describes the U.S. as being in \u201ca no man\u2019s land in which the economy muddles through, inflation stays above 2%, and the Fed doesn\u2019t want to do more damage than it already has.\u201d<\/p>\n

\u201cNot only is the unemployment rate too low in order to win the fight against inflation, but the wealth effect from booming stock markets is going to exacerbate the problem,\u201d Zaccarelli said. Stocks trading near record highs are going to reduce the incentive for consumers to cut back on spending, and \u201conly a recession or another bear market in stocks has the ability to shock consumers into cutting back.\u201d<\/p>\n

Read: <\/strong>Big stock market rally to be followed by \u2018big collapse,\u2019 says BofA\u2019s Hartnett and Stock market could face $150 billion headwind from rebalancing sales: JPM<\/p>\n

The summer months are often referred to as the \u201csummer doldrums\u201d because of the tendency of equities to underperform. Historically speaking, June, July and August tend to produce lower returns in the S&P 500 SPX than other parts of the year, according to Dow Jones Market Data. The average performances for each month is -0.3% for June, +1.4% for July, and -0.61% for August \u2014 versus +1.92% in November, +1.73% for April, and +1.62% in October, based on data between January 1990 and May of this year.<\/p>\n

Stocks could be particularly vulnerable to a pullback over the summer if incoming data swings expectations back toward the Fed\u2019s projections. It\u2019s not just stock-market bulls who may turn out to be wrong about the central bank\u2019s ability to hike twice more this year. Bearish portfolio managers have been \u201chedging their positions because they don\u2019t want to miss out on the AI frenzy,\u201d which has helped to juice the recent rally in stocks, said Eric Sterner, chief investment officer at Apollon Wealth Management, which manages $3.9 billion from Mount Pleasant, S.C. <\/p>\n

\u201cThe market is overvalued right now and it\u2019s a house of cards because it\u2019s being driven by mega-tech stocks,\u201d Sterner said via phone. \u201cWe are remaining defensive by focusing on maintaining or looking at companies or funds that are less sensitive to the S&P 500\u2019s direction because we still think we will hit a recession, potentially in the fourth quarter or early 2024.\u201d <\/p>\n

U.S. markets are closed on Monday for the Juneteenth Day holiday and Fed Chairman Jerome Powell\u2018s two-day, semiannual testimony to Congress on Wednesday and Thursday is the highlight of the shortened week ahead. <\/p>\n

The U.S. home builder confidence index for June is set to be released on Monday. <\/p>\n

Tuesday brings May housing starts and a speech by New York Fed President John Williams, followed the next day by Senate hearings for Federal Reserve Governors Philip Jefferson and Lisa Cook. President Joe Biden nominated Jefferson in May to serve as the Fed\u2019s vice chair and renominated Cook to another full term on the Fed\u2019s board. <\/p>\n

On Thursday, weekly initial jobless claims will be released, along with current account data, May\u2019s existing home sales, and U.S. leading economic indicators.<\/p>\n

Friday brings S&P Global\u2019s flash U.S. services and manufacturing purchasing managers\u2019 indexes for June.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Summer is traditionally regarded as a sluggish time for U.S. stocks, given the Wall Street adage: \u201cSell in May and go away.\u201d This year, though, may turn out to be markedly different from past years. One reason is bullish investors are steadfastly holding on to the view that U.S. inflation is set to fall by […]<\/p>\n","protected":false},"author":1,"featured_media":24276,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-24275","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\n\u2018Summer doldrums\u2019 in stocks put to the test as doubts linger on more Fed rate hikes | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Summer is traditionally regarded as a sluggish time for U.S. stocks, given the Wall Street adage: \u201cSell in May and go away.\u201d This year, though, may turn\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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