The stock market is currently in the process of rebounding from a recent bout of selling, but appearances can be deceiving. Don't be fooled - experts believe there is more potential downside ahead.
A Narrow Escape
As of Wednesday, the S&P 500 rests just under 5000, teetering on the brink of a positive territory after experiencing a 1.4% drop on Tuesday.
Inflation Concerns
One of the main causes for concern among investors is the unexpectedly high rate of inflation in January, which clocked in at an annual pace of 3.1%. This development has prompted fixed-income markets to reconsider their belief that the Federal Reserve is poised to lower interest rates. Multiple data points indicate that the economy remains robust, further suggesting that the Fed will likely refrain from lowering rates as they focus on curbing demand and inflation.
A Temporary Respite
Although the stock market seems to be gradually recuperating on Wednesday, certain key indicators hint at an impending resumption of its downward trajectory.
Interest Rates: A Crucial Factor
The most significant clue lies in interest-rate expectations. Current market levels appear to incorporate an overly optimistic outlook for Fed rate cuts. The fed funds futures market has adjusted its previous forecast for six cuts, instead now foreseeing only three to four rate decreases by the end of the year - a reduction of nearly one percentage point.
As the stock market treads uncertain waters, investors would be wise to approach the situation with caution, keeping a close eye on future developments and adjusting their strategies accordingly.
Stock Market's Earnings Multiple and Potential Decline
Higher Rates and Lower Earnings Expectations
The Resilience of the Stock Market
Fragility of Support Levels
Beware of the Runaway Market
In recent news, the expectations for Fed rate cuts have reached a level comparable to late last summer. According to Essaye, analysts now anticipate three to four rate cuts, aligning with the figures seen when the S&P 500 was trading at approximately 4,400. This resurgence of rate cut expectations should bring caution to investors, as a potential runaway market looms on the horizon.
Remember, in times like these, it is crucial to stay vigilant and make informed decisions.
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