Wednesday, September 27, 2023
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At midyear point, markets still strong but could be at tipping point

Helped by beneficial employment data and largely ignoring the warning signs for a coming recession, Wall Street has defied initial expectations.

MANHATTAN (CN) — The first six months of this year proved to be one for the bulls, with all three U.S. indices pulling out gains after seeing a downturn in 2022.  

While the increases seen by the Dow Jones Industrial Average have been relatively meager this year — gaining 730 points in the last six months — the tech-heavy S&P 500 and Nasdaq have seen major gains. By the closing bell on Friday, the S&P has increased 459 points over the last six months, while the Nasdaq added 2,793 points during that period.  

The week was relatively uneventful for Wall Street, with investors turning some of their attention to the fallout from Canadian wildfires pouring into the Northeast. Smoke in the United States is predicted to let up soon, but “it will take a bit longer for the economic clouds to lift,” wrote Christopher Crooks at Tower Bridge Advisors.

Crooks wrote that the stock market this week has had to “deal with a foggy haze of mixed economic signals,” and those mixed signals continued this week.

On Monday, the ISM Services index showed a drop to 50.3 last month compared with 51.9 in the prior month, below the forecasted 52.4 estimate. The report notes that “there has been a pullback in the rate of growth for the services sector,” and that, while most respondents indicate business conditions are stable, they worry about a slowing economy.

A deeper dive into the report indicates the U.S. economy is already slowing down, despite what recent employment data suggest. New orders fell to 52.9 from 56.1 in April, while the backlog index fell from 49.7 to 40.9, the lowest reading since May 2009. Even ISM’s employment index fell, from 50.8 in April to 49.2 last month.

“In contrast to the strength of payroll employment growth last month, the fall in the ISM services index to a five-month low … suggest the economy is barreling towards recession,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, wrote in an investor’s note.

Hunter predicted that the beginning of recession could start as soon as the third quarter of this year, adding that “a worsening downturn in business investment and a slump in consumption growth suggests that GDP growth will be barely above zero in the second quarter.”

On Thursday, the Labor Department showed that initial unemployment claims picked up a bit, with 261,000 claims filed during the week ending June 3, the highest level since late October 2021. Fortunately, continuing claims fell by 37,000 during the previous week.

Some experts are not too worried by this data point. “It’s likely more noise than signal,” wrote Matthew Martin at Oxford Economics. “Initial claims can be volatile around holidays and the new data include Memorial Day,” he wrote. “Therefore, the increase in new filings don’t warrant any change to the baseline forecast.”

Most experts say the resulting unemployment data will keep the Federal Reserve put when it meets next week to determine if it will keep interest rates where they are, raise them, or possibly lower them. The consensus was that the Fed would “skip” the meeting, resulting in a hold on rates.

But other central banks have kept up their pressure, most recently the Bank of Canada this week increasing its policy rate by 25 basis points, so another rate hike isn’t entirely out of the question. The European Central Bank is set to meet next week and is expected to increase its rate by another 0.25%, while next Friday the Bank of Japan has its own interest rate decision to make.

“The jump in initial claims will catch policymakers’ attention,” said Bill Adams, chief economist at Comerica Bank, adding that “a surprise hike can’t be ruled out” since some at the Fed have called for the central bank to keep its foot on the gas pedal.

Follow @NickRummell
Categories / Economy, Financial, National, Securities

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