Wall Street’s losing streak ends, but the uncertainty that drove it persists

The stock market’s staggering streak of losses came to an end last week, with the S&P 500 snapping a seven-week losing streak and moving away from the edge of a bear market with a 6.6% rebound through Friday. .

But the concerns that caused panic on Wall Street this year remain unresolved. It is far too early to tell whether the consumer price boom has peaked, whether the Federal Reserve has charted the right course for interest rates, or how well the economy will be able to withstand rapid inflation and to rising borrowing costs.

Until there is clarity on these issues, analysts said, it would be a mistake to assume that this year’s stock decline was over. As stock prices have tumbled, falling around 13% since early January, expectations that the sell-off has run its course have repeatedly been proven wrong, with the market changing direction as each piece of news on the market economy was coming. Last week’s rebound, as investors poured some $20 billion into global equity funds, could be another short-lived rally.

“There is no certainty, especially in the short term,” said Victoria Greene, chief investment officer at G Squared Private Wealth, an investment adviser. “It could be a choppy summer where you’re going to have some ups and downs and you’re going to get rocked.”

Recent gains have been underpinned by good health news for US consumers. Several retailers, including Macy’s and Nordstrom, reported better-than-expected quarterly results, saying shoppers are ready to trade in purchases as they begin to travel again and return to the office. Government data on Friday showed Americans continued to spend in April, dipping into their savings to do so even as they faced higher costs.

Just a week earlier, reports from two retail giants – Walmart and Target – had triggered the exact opposite reaction, sounding the alarm that some consumers had reached their limit and inflation was also starting. to earn corporate profits. That fear helped push the S&P 500 to its seventh consecutive weekly loss, the longest period of decline since 2001 after the dot-com bubble burst.

The mixed reports testify to how inflation affects people differently, economists say, with low-income Americans changing their habits accordingly. But they also underscore one of the biggest challenges investors have faced when trying to adjust their expectations: an ever-changing picture in which debates seem to be settled one day only to resurrect the next.

Not so long ago, the market rally was relentless, lifting shares of tech giants like Apple, which in January was briefly worth $3 trillion, the first company to hit that high point. Even as the pandemic raged, the S&P 500 was shot from record to record, rising 90% over three years to 2021.

These are gains fueled by near-zero interest rates cut to that level by the Fed in March 2020. The same policies, along with government stimulus spending, have contributed to an increase in consumer demand for everything from cars to electronics that helped inflame the inflation problem that scares investors today.

As consumer prices rise at their fastest pace in 40 years, the Fed abruptly reversed course, raising interest rates in March for the first time since the pandemic began in a bid to cool the economy. ‘economy. Russia’s invasion of Ukraine and new Covid-19 shutdowns in China have also increased risks to growth, food and energy supplies, and prices of goods generally.

All of these factors have led economists to lower their expectations for economic growth in the United States. A National Association for Business Economics survey showed forecasters expect gross domestic product to rise 1.8% in the fourth quarter from a year earlier, down from their February forecast. by 2.9%.

Now investors expect the Fed to raise its benchmark borrowing rate to as much as 2% by July, a big jump but by no means the last increase expected this year. As well as being a drag on the economy, higher borrowing costs mean investors have been forced to rethink what they’re willing to pay for stocks or other risky investments – and higher thieves were the hardest hit.

“The world is reassessing extraordinarily low interest rates and extraordinarily accommodative monetary policy for the end,” said David Lefkowitz, Americas head of equities at UBS Global Wealth Management. “The losses are much more painful than the pleasure we received from seeing the gains.”

Any sales could also impact the real economy, as retirement savings, college savings accounts or relief funds lose value and business leaders become less willing to take risks.

“A lot of wealth has been destroyed in the last five months,” said Russ Koesterich, portfolio manager of the BlackRock Global Allocation Fund. “It has an effect on business sentiment and on business hiring and investment plans. It also has an effect on consumer behavior.

For now, the stock market has narrowly avoided falling into a bear market, generally defined as a 20% decline from a recent high that signifies a severe drop in sentiment towards the market and the economy.

It did, however, come closer on May 20, briefly falling to that level before rising again at the end of trading. After last week’s rebound, the S&P 500 is 13.3% below its Jan. 3 high, far from bear market territory.

But there are other ways to measure investor unease. One of them is that big swings in stock prices are more common these days. While it’s easier to ride a dip, last week’s gain was part of that volatility.

“It’s also volatility,” Steve Sosnick, chief trader and strategist at Interactive Brokers, said of the week’s gain. “That’s what I like to call socially acceptable volatility.”

There will be a clearer turning point, Mr. Sosnick said, when investors decide the Fed is done raising rates.

“The Fed doesn’t have to be finished – people just have to perceive that they will be finished,” he said. Knowing when that will happen, however, is impossible at this point.

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