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HomeLatest NewsThe 'rally' of the stock market ignores risk: why logic invites us...

The ‘rally’ of the stock market ignores risk: why logic invites us to think otherwise

Date: March 29, 2024 Time: 21:08:26

The difference that a few simple words can make. “The disinflation process has begun,” Federal Reserve Chairman Jerome Powell told a news conference last Wednesday, and with it, stocks took off as investors priced in a lower peak for interest rates from federal funds and higher probability of rate cuts in the second half of 2023.

For the week, the S&P 500 rose 1.6%, the Dow Jones lost 0.2%, and the Nasdaq outperformed the rest with a 3.3% gain. It is about to enter a bull market, up almost 20% from its December 28 low. In this sense, the employment data confirmed that it is difficult to see a recession, no matter how much you squint.

Friday’s release showed the US economy added a seasonally adjusted 517,000 nonfarm jobs in January, more than double the job growth expected by economists. The unemployment rate, at 3.4%, is the lowest in the last 54 years. Despite this, average hourly wages increased by 4.4% year-on-year, slower than the 4.8% registered up to December. This is a promising sign that wage growth can slow without widespread job losses or a slowdown.

But there are those who issue warnings that it continues to have a great disconnect in the logic of the market. “If the labor market and the economy hold up, the Federal Reserve may not be inclined to lower interest rates in the second half of 2023, as implied by futures prices. It could take a real deterioration in economic data to prompt the central bank to act,” Morgan Stanley says in a report.

“In other words, it’s hard to see anything other than higher rates for longer – which would lift bond yields and put pressure on equity valuations – or disappointing growth, which would drag earnings down.” , is added from the US bank.

The market ignores fear

But the market is on its own and seems immune to any stimulus that could point in the direction of the slowdown. Right now, all you see is easing financial conditions, an economy in good shape, and inflation subdued. So much so that the year-to-date rally has been driven solely by optimism in the form of rising valuation multiples.

“The price/earnings ratio (PER ratio) of the S&P 500 has risen 8% this year, even though earnings expectations have declined 1%. The environment is decidedly risky, and something else: small-cap stocks outperform large-cap stocks and growth prevails over value”, they analyze from Atlantic Capital. Cathie Wood’s ARK Innovation ETF is, in fact, up 42% in 2023.

“Investors have to be picky,” says Evan Brown, head of multi-asset strategy at UBS Asset Management. Brown expects no recession in 2023, experienced the strength of the US labor market, the improvement of the situation in Europe and China, and the fact that consumers and companies are less sensitive to interest rates than a decade. His forecast is not for lightning growth, but for a world economy that just hangs on.

Brown expects the Fed to pause rate hikes in the coming months and keep them higher for longer. “This should keep the S&P 500 P/E multiple in check and favor value-oriented stocks,” he says. The overall picture leaves Brown neither too bullish nor too bearish, at least as far as the index level is concerned. “It is better to choose the places”, concludes the expert of the Swiss entity

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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