By Lewis Krauskopf
NEW YORK (Reuters) – Economic worries are again visible on Wall Street as concerns grow that months of high interest rates are beginning to hurt U.S. growth.
For months, investors had been optimistic about falling inflation and gradually declining employment, believing that this would motivate the Fed to cut rates.
With a rate cut in September in sight following a Fed meeting earlier this week, investors are concerned that the central bank has kept rates at restrictive levels for too long, potentially jeopardizing economic growth.
Evidence of such a shift in thinking came on Thursday, when data showing weakness in the labor market and manufacturing sparked a sharp selloff in U.S. stocks, with investors dumping everything from chip stocks to industrial shares and piling into defensive moves. Highly valued technology stocks tumbled, extending losses in the Nasdaq Composite to nearly 8% from a record high hit in July.
“The narrative is that rate cuts are only coming because inflation is getting closer to target, while everything else is still pretty solid,” said Angelo Kourkafas, senior investment strategist at Edward Jones. “But now there are some cracks.”
The concerns are focusing on upcoming releases, including Friday’s jobs report and an inflation report later this month. If there are further signs of weakness, the concerns could increase.
Next week, industrial leader Caterpillar and media and entertainment giant Walt Disney will release earnings figures, providing more insight into consumer health and production. There will also be reports from big names in healthcare, such as weight-loss drug maker Eli Lilly.
Bets in futures markets on Thursday suggested growing unease about the economy. Fed fund futures reflected traders pricing in a more than 25% chance of a 50 basis point cut at the central bank’s September meeting, double the odds a day earlier, according to CME FedWatch. Futures were pricing in a total of 85 basis points of rate cuts through 2024, compared with just over 60 basis points priced in on Wednesday.
“The reassurance (the market) took yesterday that the Fed was on track for a rate cut in September has turned into the reality that there is still a long way to go between now and the September meeting,” said Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management.
Broader markets also showed signs of unease. The Cboe Volatility Index, known as Wall Street’s fear gauge, is near a three-month high as demand for options protection against a stock market selloff increased. Concerns about renewed unrest in the Middle East also added to investors’ jitters.
Meanwhile, investors are favoring sectors such as utilities and healthcare, which are popular options during times of economic uncertainty.
Options data for the Health Care Select Sector SPDR Fund showed the average daily balance of put and call contracts was the most bullish in about three years last month, according to a Reuters analysis of trade alert data.
Options trading on the Utilities Select Sector SPDR Fund also shows a pullback in defensive positioning, indicating that traders expect the sector to strengthen.
The health care sector has risen 4% in the past month, while utilities have gained more than 9%. By contrast, the Philadelphia SE Semiconductor index has fallen 11% in that period, amid sharp losses in investor favorites such as Nvidia and Broadcom.
Some investors said the data could provide an excuse to lock in profits after the overall strong market performance in 2024.
“What you’re seeing now, and you’re probably going to see it over the next month or two, is some consolidation and sideways price action,” said Bill Strazzullo, chief market strategist at Bell Curve Trading. “The larger bull trend is intact.”
Investors will have more earnings reports to mull over in the coming weeks, including Nvidia’s at the end of the month. In addition, the U.S. presidential election could add to volatility.
“It’s such a fine line, because you want just enough economic weakness that the Fed has to cut rates, but not so much that it’s bad for corporate profits,” said Burns McKinney, a portfolio manager at NFJ. “The Fed is almost like a surfer riding a wave and trying to time everything just right.”
(Reporting by Lewis Krauskopf; additional reporting by Saqib Iqbal Ahmed, David Randall and Chibuike Oguh; Editing by Ira Iosebashvili and Edwina Gibbs)
