Did this week feel crazy? There’s a reason why.
A few times a year, the market stars align, and the Federal Reserve holds a meeting the same week that a GDP report is released and the majority of S&P 500 companies report earnings. It’s an insane week for headlines and analysis. Add in the pressure of a potential recession and a Fed on the move, and you’ve got a recipe for market stress. No wonder we’ve all felt on edge lately — or is that just the norm now?
In all seriousness, we learned a lot about the economy and markets this week.
Here’s a little cheat sheet of the four most important numbers and what they could mean for you.
Folks, we have ourselves a technical recession — though not an official one (yet). But no matter your recession definition, Q2 gross domestic product data made it clear that the economy is going through a rough patch. Consumers and businesses have noticeably pulled back on their spending in response to high inflation. Housing activity was the biggest drag on GDP since 2010 (excluding the dreadful quarter of COVID shutdowns in 2020). The Fed wanted a chiller economy, and they got it.
We’re at an interesting juncture. The economy may slow even more in the months ahead, and we could see more layoffs and closures as businesses grapple with higher rates and less demand. Lower spending may translate into lower company earnings — a big risk to the market right now. But how much of that is actually accounted for in stock prices? It’s possible that the answer is different depending on which sectors you look at.
TAKEAWAY: The economy is in pain, no matter how you want to label it. Tech stocks may have already taken their hit (we’ll talk more about that in a second), but other economically sensitive sectors could be in for a bigger slide if this contraction gets any worse. Either way, make sure your financial house is in order.
Luckily, this slowdown was all part of the Fed’s plan. And on Wednesday, Fed chair Jay Powell admitted that aggressive rate hikes may actually be weighing on growth (as second-quarter GDP showed).
This is important. The Fed’s main job is to balance healthy inflation with a strong job market, and it’s becoming obvious that they may have focused a little too much on the inflation side of the equation. In investors’ eyes, it may be time to let up on rate hikes, especially because slowing demand could end up taming inflation.
Powell seemed to thread the needle well in his post-meeting press conference, saying that the Fed will now take hikes meeting by meeting and evaluate the need for each rate hike based on incoming data. This flexible stance (versus fighting inflation at all costs) could be exactly what the ailing economy needs right now.
TAKEAWAY: The economy may be in a rough spot, but the Fed is also willing to rethink rate hikes to take the edge off. That might be good news for the market, which tends to recover well before the economy does. Watch job market data to gauge just how bad this slowdown will be (and what the Fed will do next).
Yep, you read that right. The Nasdaq 100 soared on Wednesday, presumably on Powell’s message that rate hikes could be in the rear-view mirror soon. Tech stocks have been the biggest victim of the Fed’s aggressive campaign against inflation, so it makes sense that tech is coming back to life. After all, the Nasdaq 100 has outperformed the S&P 500 in four out of the last six stretches of Fed rate cuts.
But where’s the center of gravity for tech and growth? It’s still difficult to tell. Smaller, more concept-driven tech companies could struggle to find financing if rates stay high, and we still haven’t fully grasped how much damage has been done to growth names. Even big tech seems to be suffering. Just this week, Facebook just recorded its first-ever drop in revenue, and Apple, Google, and Amazon have all hinted towards slower hiring ahead. This is more prudent management than desperation, but it shows that few firms have been safe from tech’s fallout.
TAKEAWAY: If we’re truly in the early innings of a new bull market, riskier stocks could lead the way up as rates come down. But before you rush back into that hot tech stock, think through how long you can wait for the story to come to fruition and if you’re willing to take on that risk.
I’m not the type of analyst who frequently draws lines on charts, but it’s worth pointing out that the S&P 500 crossed an important threshold this week: 4,000. Round numbers can be psychological barriers in markets, and the S&P 500, in particular, has been known to hover around thousands milestones in the past. In fact, it tested 4,000 a few times in May before breaking decisively lower about a month ago. The S&P 500 has already rallied over its 50-day moving average — a classic technical line that could act as support — and 4,000 may serve as extra protection if stocks end up slipping.
TAKEAWAY: Don’t treat lines on a chart as gospel, but round numbers and moving averages may act as lines of defense if this recovery breaks down.
*Data sourced through Bloomberg. Can be made available upon request.