{"id":39958,"date":"2023-07-24T19:02:56","date_gmt":"2023-07-24T23:02:56","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/the-stock-market-is-rallying-3-things-that-could-end-the-upturn\/"},"modified":"2023-07-24T19:02:58","modified_gmt":"2023-07-24T23:02:58","slug":"the-stock-market-is-rallying-3-things-that-could-end-the-upturn","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=39958","title":{"rendered":"The Stock Market Is Rallying. 3 Things That Could End the Upturn."},"content":{"rendered":"
\n
<\/p>\n
<\/p>\n<\/figure><\/div>\n

The stock market has been as hot as the weather, so it is no surprise that investors who were sure a recession was coming at the end of last year\u2019s bear market are now convinced, perhaps mistakenly, that one isn\u2019t on the way. <\/p>\n

Last week, Goldman Sachs (ticker: GS) cut its odds of a recession in the next year to 20% from 25%, citing recent upbeat data on inflation and employment. And consumer spending, a huge driver of economic growth, keeps chugging ahead despite a higher cost of living.<\/p>\n

\n

Also last week, the
\n S&P 500
\n hit a new 52-week high, the
\n Dow Jones Industrial Average
\n notched its longest winning streak since August 2017, and the
\n Nasdaq Composite
\n \u2014the only one of the major three indexes to end the week lower\u2014is still up more than 34% so far in 2023.<\/p>\n

All that has left many bears out in the cold, but reality is never simple. An economic downturn may still be on the way. Sevens Report\u2019s founder Tom Essaye sees three areas where problems could still arise. <\/p>\n

First, the Federal Reserve has taken interest rates up very quickly, to levels that may be historically low but are still much higher than in recent years. That swift rate-increase campaign was the basis of much pessimism last year, given the potential for a higher cost of capital to have an excessively chilling effect on individual and corporate spending. <\/p>\n

The idea that the Fed has gone too far has largely faded as recent data have shown employment and consumer spending are still strong. Yet Essaye notes that the pain of higher rates could still be on the way. Inflation is still far from the Fed\u2019s target of 2%, so rates may remain high for longer than expected. The combination of increased borrowing costs, slowing wage growth, and the continuing impact of inflation is quickly eroding the excess capital Americans built up during the pandemic.<\/p>\n

In addition, real interest rates only turned positive recently, giving borrowing costs more potential to derail growth, as inflation readings had been higher than the fed-funds rate, the bank\u2019s target for short-term borrowing costs. \u201cThis matters because interest rates are only restrictive on the economy once they are solidly higher than the prevailing inflation rate,\u201d he wrote. \u201cPoint being is that rates are only now truly restrictive.\u201d <\/p>\n

Then there\u2019s the fact that inflation has been beneficial for some companies, bolstering sales and price increases. Disinflation could also take the wind out of the sails of the labor market, as it has the potential to cut into corporate margins in the coming quarters, leading to calls for layoffs. If that happens along with a pullback in consumer spending as savings dwindle and rates remain high, more companies could turn to cutting staff.<\/p>\n

That said, \u201cnone of these risks are going to cause a near-term reversal in stocks,\u201d Essaye noted, especially as we keep getting positive data points like those that drove last week\u2019s gains.<\/p>\n

In that sense, it does make sense that investors are enjoying the market\u2019s time in the sun. Summer\u2019s lease may have all too short a date, but it doesn\u2019t look likely to run out soon. \u00a0<\/p>\n

Essaye still recommends buying into cyclical stocks, such as those tracked by the
\n Industrial Select Sector SPDR\u00a0exchange-traded fund
\n (ticker: XLI), the\u00a0
\n Materials Select Sector SPDR\u00a0ETF
\n (XLB), the\u00a0
\n Energy Select Sector SPDR\u00a0ETF
\n (XLE), and the\u00a0
\n Financial Select Sector SPDR\u00a0ETF
\n (XLF).<\/p>\n

But remember: Goldman Sachs\u2019s change to its recession forecast, putting the odds at 20%, leaves the probability the bank sees above the post-war average of 15%. Economists surveyed by The Wall Street Journal are getting more optimistic, but still see a 54% chance that a recession will happen in the next 12 months.<\/p>\n

Two more caveats: There are ample coming opportunities for the Federal Reserve to assume a more hawkish tone than bulls might like. And the French fry sales indicator\u2014or \u201cfry attachment rate,\u201d which tracks how often fast-food customers add a side of fries as a proxy for economic confidence\u2014is sending mixed messages at the moment. <\/p>\n

Let\u2019s hope it doesn\u2019t turn investors\u2019 smiles into a Grimace.<\/p>\n

Write to Teresa Rivas at teresa.rivas@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

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

The stock market has been as hot as the weather, so it is no surprise that investors who were sure a recession was coming at the end of last year\u2019s bear market are now convinced, perhaps mistakenly, that one isn\u2019t on the way. Last week, Goldman Sachs (ticker: GS) cut its odds of a recession […]<\/p>\n","protected":false},"author":1,"featured_media":39959,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-39958","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nThe Stock Market Is Rallying. 3 Things That Could End the Upturn. | iFintechWorld<\/title>\n<meta name=\"description\" content=\"The stock market has been as hot as the weather, so it is no surprise that investors who were sure a recession was coming at the end of last year\u2019s bear\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=39958\" \/>\n<meta property=\"og:locale\" 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