No, it is not a recession, but there is evidence that some economic hurdles exist and some market watchers believe that until a positive resolution is found on that front, market participants versus previously committed buy-the-dip market participants could be more reserved, could be more cautious about stocks.
Recently, there have been growing concerns that inflation will prove to be more permanent than temporary, and the lack of estimates for employment growth, confirming that the economy is grappling with some issues that could deter investors from riskier investments .
“Equity markets have entered a volatile zigzag pattern, with the health of the economy and earnings environment undergoing heightened scrutiny that has been offset against the continuing buy trend of the slump. The volatility has been noteworthy, with Tuesday being the weakest session since May and Thursday being the best day since July, but the S&P 500® index ended the week slightly higher, ”noted Nationwide’s Mark Hackett.
With limited time left in September, the S&P 500 is 3.67% lower for the month ending September 28, putting the domestic equity benchmark at its highest monthly loss since January. In historical context, September equity weakness is not a cause for concern as August through October is typically the worst three month range for stocks.
Still, as Hackett notes, rising government bond yields and Federal Reserve policies – the latter could include a rate hike in 2022 – could weigh on investor decision-making.
“Interest rates soared after an FOMC meeting last week that paved the way for a change in Fed policy. The 10-year government bond yield rose 1.50%, its highest level since June, and the yield curve is at its steepest level in nearly three months, “said Hackett.
Hackett also mentions a potentially threatening bond market scenario where the yield curve steepens due to rising long-term rates. That can happen in the inflationary environment that investors have today.
“A steepening of the curve driven by higher long-term interest rates is known as ‘bear steepener’ because it often occurs when inflation expectations rise and investors expect the Fed to raise interest rates,” said Hackett.
Still, government bond yields are low and so are credit spreads, suggesting investors will wait for the recent slump and reconsider stocks sometime in the fourth quarter.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and cannot actually occur. The information on this website should not be used or construed as an offer to sell, solicitation to buy, or recommendation of any product.