The turmoil in the US stock market since October has continued, and the mixed performance of star technology stocks has disappointed investors. The repeated situation between Palestine and Israel and high US bond yields have dampened risk appetite, and the phenomenon of capital outflows has not changed. The Cboe panic index VIX, which measures market volatility, has risen to its highest level since March this year.
The Federal Reserve's interest rate meeting is about to take place, and clues to future policy paths may become key to easing market anxiety. So, can the Federal Reserve become the "savior" of US stocks?
How the Federal Reserve Assesses the Economy
The latest week's data shows that the US economy still shows strong resilience. In the third quarter, the US GDP grew at an annualized rate of 4.9%, marking the fastest growth rate in the past two years. Among them, consumer spending, which is the main engine of US economic growth, grew at a rate of 4% from July to September, and the tightening labor market is expected to continue supporting the US economy to maintain steady expansion this quarter.
At the same time, the trend of inflation cooling continues. As a forecast indicator for future inflation trends seen by the Federal Reserve, the core personal consumption expenditure price index (PCE) fell to 3.7% in September, the lowest level since June 2021.
Bob Schwartz, a senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that the strong growth in the United States in the third quarter is not surprising because recent monthly data fully reflects this in advance, especially consumer spending, which is the main driving force of the US economy, Although the Federal Reserve may remain stagnant in November, growth far above the trend line will keep the Federal Reserve vigilant against inflation.
However, the outlook for the US economy is not without risks. The latest survey by the University of Michigan shows that consumer confidence significantly declined in October due to geopolitical uncertainty and sluggish stock market performance. Inflation expectations have also increased, with respondents predicting average inflation rates of 4.2% and 3.0% over the next 12 months and 5 years, respectively, compared to 3.2% and 2.8% in September.
At the same time, many institutions believe that it remains to be seen whether consumers can maintain resilience in the coming quarters. The real question is whether this trend can continue in the coming quarters, we don't think so, "said Jeffrey Roach, Chief Economist of LPL Financial. He said it's too early to judge the final quarter of this year, but the lag in monetary policy will ultimately slow down growth momentum.
The yield of medium and long-term US Treasury bonds rose and fell, dropping to 5.01% for two-year notes and 4.85% for benchmark 10-year notes. Legendary hedge fund manager Bill Ackman stated that his short positions in 30-year US Treasury bonds have been liquidated due to the faster economic slowdown than recent data suggests. Federal funds rate futures show that the likelihood of a rate hike within the year has dropped to 23%.
Schwartz told First Financial that he believes the third quarter should be the peak period of expansion, as inventory and government spending have to some extent stimulated growth and are not expected to occur again. More importantly, the economy is facing a severe headwind and a series of uncertainties, "he said
Schwartz expects the Federal Reserve to emphasize caution while keeping interest rates unchanged, and Federal Reserve Chairman Powell may reiterate his recent stance that rising bond yields may mean slower growth and inflation, stating that the Federal Reserve will only raise interest rates if growth remains strong and labor market conditions tighten again.
When will the downward trend reverse
The US stock market's new financial reporting season is already halfway through. According to Dow Jones market statistics, 77.6% of the 245 companies in the S&P 500 index that have already reported results have exceeded expectations, slightly above the historical average. The institution expects US stock returns to increase by 4.3% year-on-year in the third quarter, a significant improvement from the 1.6% forecast at the beginning of the month.
However, this has not reversed the weak market situation since September. As of last week's close, the US stock market has completely wiped out all the gains since July. After a group of disappointing earnings announcements from star stocks, including Google and Tesla, the Nasdaq Composite Index took the lead and fell to a revised range, with the S&P 500 Index joining in towards the end of the trading day.
Analysts believe that the highly anticipated performance differentiation of star technology stocks has dampened investors' confidence, and the downward revision of overall market profit expectations for the fourth quarter has weighed on valuation prospects. At the same time, risk factors that have plagued the market since October still exist, and there is currently no sign of a ceasefire in the Israeli-Palestinian conflict. The inflation level, which is still far from the medium-term target, may allow the Federal Reserve to maintain interest rates at high levels for a long time, exacerbating economic risks.
Baird investment strategy analyst Ross Mayfield said, "It's difficult for bulls to counter market trends, as the trend has been moving downwards. Although corporate returns have been good, it hasn't provided enough catalyst to trigger a reversal. If inflation is around 3%, the economy will be fine. This is our last mile towards achieving the Fed's goal. It depends on (the Fed) How much effort do you hope to pursue 2%. This is a big problem
Investors continue to choose to flee on a large scale. According to financial data provider LSEG, the US stock fund's reduction in holdings last week reached $2.69 billion, marking the sixth consecutive week of net sales. At the same time, money market funds have attracted $22.7 billion in capital inflows, and there is still a strong sense of risk aversion and wait-and-see sentiment in the market.
Jiaxin Wealth Management wrote in its market outlook report that the market received strong GDP and consumption data last week, and the release of the Speaker of the House of Representatives also eased concerns about congressional politics. However, investors still struggle to overcome concerns about geopolitical factors, fiscal deficits, and interest rate paths. As the S&P 500 and Nasdaq fall into the correction range, the oversold of short-term technical indicators further strengthens.
The bank believes that based on a series of emotional indicators over the past week, the intensity of the sell-off may be approaching its limit, and a short-term bottoming rebound may occur at any time. However, the trend of the market still depends on changes in geopolitical factors and the trend of US bond yields, and the Federal Reserve decision may become a potential turning point for the rebound.