The times they may be a changin

It was not a good week for stock markets. The world’s economic barometer, the S&P 500, extended its losses of the past few weeks, now giving back almost 6% of this year’s gains. The Nasdaq composite is almost back in correction territory, defined by a 10% fall from a previous high. This week, the Fed failed to cut interest rates. In months gone by, I think markets took this as a sign the Fed was confident in the economic outlook, as much as they were concerned about how much any easing of monetary policy would stoke inflation.

The markets are now getting themselves concerned after some weak manufacturing data this week and further evidence that the US jobs market is weakening and that the US economy is not in the health it is being given credit for. If the Fed want any further signs of what investors expect in September from them, they are getting it and may get more of it. Further evidence of the change in sentiment is that the Vix climbed to highs last seen in March 2023, when investors were convinced that the Fed policy would ultimately cause an economic recession. The risk-off sentiment was further underscored by the appetite for US treasuries as the yield on the 10-year bond fell below 3.8%.

It also has to be pointed out that tech earnings have disappointed relative to expectations, contributing to the Nasdaq selloff, as those expectations have appeared to have gotten ahead of themselves. Amazon was the latest Mag 7 to underwhelm the investment community as capital spending impacted margins. There is no doubt these companies are the leaders in the new world, but the market is just trying to reprice return expectations. Life is ever thus; greed overtakes fear.

The escalation in geopolitical tensions in the Middle East as US and UK citizens are urged to leave Lebanon, is also impacting investor risk appetite. Fears grow that the assassination of the Hamas leader will lead to a regional war. There is plenty of diplomatic effort being made to prevent an escalation.

Looking to the week ahead, the market’s confidence in the soft, stroke, no-landing scenario will undoubtedly be further tested. The fear is that further signs of softer economic activity will eventually drag on earnings. It is also quite possible that the unrest in the UK is currently likely to impact the economy. There will be further focus on the monthly PMIs. There are more well-known companies reporting earnings; the spotlight will also be on Chinese trade data from July after PMI figures for the period suggested that export markets were unable to offset lower consumer demand domestically. Historically, this time of year is one for caution, and this appears to be no exception.