The article highlights a growing sense of unease on Wall Street, as concerns about the health of the U.S. economy deepen. This anxiety isn’t limited to the financial markets; it is increasingly being felt by American households as well. The coming week is critical, with several significant economic and earnings reports due to be released. The outcomes of these reports could have far-reaching implications, potentially derailing the fragile stock-market recovery that has been teetering ever since the market experienced its worst day in two years.
Last week, U.S. stocks endured a turbulent ride, largely influenced by the unwinding of leveraged trades that were fueled by the Japanese yen and growing fears about a weakening U.S. economy. The volatility reverberated across global financial markets, leading to a situation where all major indexes ended the week just shy of completely reversing their losses. Specifically, the S&P 500 saw a minimal decline of less than 0.1% for the week, while the Nasdaq Composite fell by 0.2%, and the Dow Jones Industrial Average dipped by 0.6%, according to data from FactSet. This performance underscores the jittery nature of the markets, which are grappling with conflicting signals about the future of the U.S. economy.
As the new week begins, the market’s attention has shifted to a fresh batch of U.S. economic indicators that are expected to be released. Investors are particularly keen on the July Consumer Price Index (CPI) report, updates on retail sales, and earnings reports from some of the nation’s largest retailers. These reports are seen as crucial because they will provide insight into whether American households are under increasing strain due to persistent inflation and rising interest rates. Any signs of stress from these reports could exacerbate concerns and lead to further market volatility.
Economists at BofA Global Research, led by Michael Gapen, have described the recent market volatility as a “Wile E. Coyote moment,” referring to the cartoon character who often finds himself suspended in mid-air before gravity finally takes hold. The metaphor suggests that the markets are in a precarious position, where the next set of data could determine whether the U.S. economy is merely slowing down gradually or heading toward a more severe downturn. The distinction is crucial, as a sharp slowdown could have far more significant repercussions for the markets and the broader economy.
The July CPI numbers, in particular, are expected to be closely watched by both investors and policymakers. These numbers could have significant ramifications for the markets and the Federal Reserve’s future policy decisions. Economists polled by the Wall Street Journal anticipate that headline inflation will hold steady at 3% year over year, while core CPI, which excludes volatile food and energy prices, is forecasted to slow slightly to 3.2% from June’s 3.3%. However, any signs of an economic slowdown or persistent inflation could send stocks into a tailspin, especially as investors become increasingly concerned about the potential for a recession.
Adding to the complexity of the situation is the persistent nature of inflation. Brian Weinstein, head of global markets at Morgan Stanley Investment Management, pointed out that inflation is likely to remain above the Federal Reserve’s 2% target for some time. He noted that certain areas, such as car and home insurance, are seeing persistent inflation, particularly in regions that have experienced population booms. These price pressures are taking a toll on consumers, as they siphon money away from discretionary spending, making it harder for inflation to fall below 2% in any meaningful way. Furthermore, uncertainties related to geopolitical conflicts and the 2024 U.S. presidential election add to the challenges, making a return to low inflation even less likely.
The article also delves into the challenges faced by American consumers, who are increasingly feeling the squeeze from years of persistent inflation and the Federal Reserve’s ongoing monetary tightening. Companies that rely heavily on consumer spending, such as Starbucks and McDonald’s, have begun issuing profit warnings, signaling a tough environment ahead. This trend is further underscored by recent earnings reports, with companies like LVMH and Airbnb noting a slowdown in consumer spending. LVMH, for instance, reported a slump in sales from its Asia-excluding-Japan business, which had previously been a significant growth driver. Similarly, Airbnb has anticipated a slowdown in leisure travel as consumers become more cautious about spending in an uncertain economic environment.
The tightening of consumer wallets is having a ripple effect on companies, especially those that cater directly to consumers. The upcoming earnings reports from major retailers like Walmart Inc. and Home Depot Inc. are expected to provide further evidence of how consumer spending is faring in this challenging environment. Brad Conger, chief investment officer at Hirtle Callaghan & Co., warned that the weakness in consumer spending could spread to other sectors, potentially leading to reduced hiring and further pressure on employment and incomes. This cyclical effect could, in turn, exacerbate the challenges facing the U.S. economy, creating a feedback loop that would be difficult to break.
Despite these concerns, economic data has so far presented a mixed picture. For instance, last week saw a rebound in the service sector, which helped to counter growing fears that the U.S. economy might be on the brink of recession. Additionally, the number of Americans applying for unemployment benefits fell, indicating that the labor market might still be in good shape despite a softer July jobs report. These factors contributed to the recovery of some of the stock market’s losses from earlier in the week, offering a glimmer of hope amidst the broader uncertainty.
However, as Brad Conger pointed out, the current market environment is fragile, with even small surprises in economic data having a diminishing impact on market sentiment. This fragility means that each subsequent positive data point is likely to have a smaller effect on the market, as investors remain cautious and on edge. The markets are in a state of heightened sensitivity, where any negative news could trigger a more significant reaction than usual.
Investors should prepare for continued volatility, as Brian Weinstein suggested. He noted that while the market’s upsides might be capped due to ongoing concerns, this doesn’t necessarily point to a hard landing or guarantee a recession. Nonetheless, the road ahead is likely to be bumpy, with investors needing to navigate through a landscape filled with uncertainties and potential pitfalls.
In summary, Wall Street and American households are both on edge as they await the release of crucial economic data and earnings reports. The outcomes of these reports could have significant implications for the stock market’s future direction. If the data reveals further strain on consumers or signals a sharper economic slowdown, it could derail the recent stock-market recovery and amplify concerns about the U.S. economy’s long-term health. As the markets remain tenuous, any signs of further strain could quickly escalate into broader concerns about the U.S. economy’s trajectory, making the coming weeks a critical period for both investors and policymakers.