Pedestrians near the New York Stock Exchange (NYSE) in New York, United States on Monday, August 28, 2023.
Gabby Jones | Bloomberg | Getty Images
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U.S. stocks fell Friday amid mixed sentiment about the economy. Only the Dow Jones Industrial Average increased over the week. Asia-Pacific markets mostly fell on Monday. Hong Kong’s Hang Seng Index and South Korea’s Kospi fell about 1%. But Japan’s Nikkei 225 index managed to reverse the trend and gained 1.1% ahead of the country’s central bank meeting on Friday.
Less adventurous investors in China
Venture capital firms in China invested $26.7 billion in 3,072 deals in the first half of the year, according to PitchBook. This represents an annualized decline of 31.4% from 2022. China’s economy – although showing signs of recovery of late – is still sluggish, hampering early-stage investments. Additionally, geopolitical tensions are deterring foreign investors from venturing into the Chinese market.
Break at the top
Major central banks around the world have likely reached maximum interest rates. That is, analysts and economists do not expect them – like the European Central Bank, the Federal Reserve and the Bank of England – to raise rates further. But that doesn’t mean banks are ready to cut rates, as challenges remain, such as rising oil prices and stubborn inflation.
A fragmented global economy
The new maritime and rail economic corridor linking India, the Middle East and Europe shows how geopolitical tensions are fragmenting the global economy. The corridor, backed by US President Joe Biden, is seen by some as a response to China’s Belt and Road Initiative. But for countries on the ground, the talk is “about multiplication/addition, not subtraction,” one researcher said.
[PRO] FOMC meeting this week
Wednesday’s Federal Reserve meeting will be the main event to watch this week. Markets are betting that the Fed will keep rates steady for now, but the path of rates in November remains uncertain. FedEx will announce its first quarter financial results the same day, providing insight into how the global supply chain is holding up.
According to University of Michigan consumer surveys, U.S. consumer confidence fell slightly from 69.5 in August to 67.7 in September, more than economists expected. To put this number in perspective, the all-time low of 50 was reached in June 2022 (when annual inflation reached 9.1%), and the all-time average is 86.
In other words, consumer confidence is improving, but it’s still not great.
On the positive side, consumers now expect inflation to fall to 3.1% year-on-year, the lowest figure since January 2021.
But if you want to be pessimistic, these two data points – lack of confidence in the economy but hope for lower inflation – suggest that consumers think inflation will fall in a year because things will not be good for the economy. In other words, the scary R-word will eventually arrive, driving prices down.
The mood on Wall Street, however, is markedly different. “Investors remained optimistic about the outlook for stocks and the economy in August,” according to a Vanguard survey of investor expectations. They expected stocks to return 5.5% over the next 12 months and thought there was only a 5.4% chance of an “economic disaster” occurring over the next 12 month.
Indeed, corporate profits could see a rebound in the fourth quarter of this year, Edward Jones senior investment strategist Mona Mahajan said on CNBC’s “Squawk on the Street.” The profit rebound could even reach double digits in 2024, Mahajan added.
Does Wall Street know something that ordinary American consumers don’t? Or are consumers simply more realistic than investors, who are still profiting from the unexpected rise in stocks this year? (Investors profiting from the rally may want to heed Ray Dalio’s warning about expensive markets.)
Either way, that exuberance didn’t show up for stocks last week. On Friday, the S&P 500 fell 1.22%, the Dow Jones Industrial Average fell 0.83% and the Nasdaq Composite fell 1.56%.
The Dow Jones, with its weekly increase of 0.12%, was the only index to finish in the green. The S&P and Nasdaq were down 0.16% and 0.39%, respectively, for the week.
“I think after digesting the additional economic data released, as well as current geopolitical pressures and other developments, we are seeing investors pull back and take a breather today,” said Greg Bassuk of AXS Investments.
With the Fed expected to keep interest rates unchanged at its September meeting on Wednesday, investors could take an extended breather this week. In this open space between breaths, the balance between Wall Street and Main Street can be achieved.