VIDEO: Do We Stand on The Precipice of a Correction?
Welcome to my latest video presentation for Mind Over Markets. The article below is a condensed transcript; my video contains additional details and several charts.
After a robust stock market rally from March through July, the mood on Wall Street has darkened so far in August, with stocks posting a decline. Are we witnessing a healthy consolidation phase, or do we stand on the cusp of a full-blown correction? Is the August slump a brief pause, or the harbinger of a steep plunge? Let’s look at the data for clues.
Leading the equity swoon have been mega-cap technology stocks. Most of the brand name tech stars already have fallen more than 10%, a magnitude that signals an official correction. The question now is whether the downward momentum will spread wider and last longer.
Reasons for optimism remain. Bullishness over economic resilience, particularly the jobs market, and artificial intelligence hasn’t completely dissipated. But in the meantime, the rally has lost momentum.
U.S. and international stocks finished last week in negative territory. For the week, the major indices fell as follows: The Dow Jones Industrial Average -2.2%; the S&P 500 -2.1%; the tech-heavy NASDAQ -2.6%; and the MSCI EAFE -2.8%. The benchmark 10-year Treasury yield rose 0.1% to hit 4.25%.
Crude oil prices, despite production cuts by OPEC+, fell 3.1% for the week, another reminder that the oil cartel only has so much power and market forces have the final say. The narrative on Wall Street has shifted from “soft landing” to recession and oil traders now fear demand destruction.
The minutes of the Federal Reserve’s July meeting, released last Wednesday, were surprisingly hawkish in tone and suggested that further rate hikes are ahead.
Also eroding optimism was the latest economic report from China, which showed worse-than-expected performance across the board.
The country’s second-quarter gross domestic product (GDP) growth widely missed expectations. China’s economy expanded by just 0.8% from April through June from the previous quarter.
What spooked global markets even more was the bankruptcy filing of China Evergrande Group (OTC: EGRNF). The debt-riddled property developer has posted massive losses.
Other property developers in China are struggling as well, raising fears of a real estate implosion in China that could trigger financial contagion. Several major Western banks and asset managers have significant exposure to China’s tottering real estate sector.
I think the U.S. economy will decelerate in the face of higher interest rates, but I don’t see the case for a sharp downturn. It’s still possible to avoid a recession.
Consumers continue to spend, corporate earnings are forecast to return to the black in Q3 and Q4, the employment situation is strong (but not overheated), and inflation has been markedly cooling.
It’s especially heartening that U.S. GDP continues to surprise on the upside. GDP increased at a 2.4% annualized rate for the April-through-June period, surpassing the 2% consensus projection. GDP rose at a 2% pace in the first quarter. The Fed currently forecasts third-quarter gross domestic product (GDP) growth of 4.1%, which is an astounding number.
The upshot: We got some bad news last week but not enough to undermine the stock market rally in a lasting way. Indeed, as of this writing Monday morning, the main U.S. equity indices were trading higher in pre-market futures contracts.
The week ahead…
Here are the major economic reports and events on deck in the coming days that have the power to move markets:
Existing home sales (Tuesday); S&P flash U.S. services and manufacturing PMIs, new home sales (Wednesday); Fed officials interviews from Jackson Hole summit, initial jobless claims, durable goods orders (Thursday); Fed Chair Jerome Powell gives opening speech at Jackson Hole, and University of Michigan consumer sentiment (Friday).
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John Persinos is the editorial director of Investing Daily.
This article originally appeared on Investing Daily.