MW Investors are nervous about the stock market and the economy - but Deutsche Bank doesn't see 'widespread alarm'
By Isabel Wang
The market decline has been driven by a narrow group of stocks, while September is a seasonally weak month for equities, strategist notes
U.S. stocks were bouncing back on Monday after suffering their worst week of the year - and one Deutsche Bank strategist believes investors shouldn't overexaggerate fears of an economic slowdown, and that recent market jitters are likely unwarranted.
"We shouldn't over-egg how bad things are," Henry Allen, macro strategist at Deutsche Bank, said in a Monday note. "We shouldn't exaggerate the extent of the market decline [last week], which was primarily driven by a narrow group [of stocks] anyway."
The S&P 500 SPX tumbled 4.3% in the first week of September, but the decline was led by a small group of megacap technology stocks, Allen noted. The so-called Magnificent Seven group of companies, represented by the Roundhill Magnificent Seven ETF MAGS, were down 5.4% last week, while the equal-weighted Invesco S&P 500 ETF RSP saw a smaller 3.1% decline in the same period, according to FactSet data.
"Even before this selloff, we already knew that September was a seasonally weak month, and equities often struggle in the leadup to close U.S. elections," Allen said.
See: S&P 500 just saw its worst first week of September since 1953, this chart shows
Moreover, a closer look at the U.S. labor-market data shows that economic conditions are not as bleak as some of the jobs reports suggest at first glance.
For example, the number of Americans who applied for unemployment benefits fell slightly to 227,000 and touched an eight-week low in the seven days that ended Aug. 31, the government said on Thursday.
The weekly initial jobless claims, the "more timely measures" of the labor market, have been falling in recent weeks, the Deutsche Bank strategist said - adding that the four-week average is currently at a 12-week low of 230,000, and has remained "clearly beneath" its peak from mid-2023.
What's more, the expectation that the Federal Reserve is ready to start lowering interest rates this month "is already having an impact" even before the central bank delivers those cuts, Allen said. "The prospect of rate cuts is helping to mitigate against the broader tightening in financial conditions."
For instance, the yield on the 10-year Treasury BX:TMUBMUSD10Y was at 3.71% on Monday afternoon, hovering around its lowest level since June 2023.
The effects of lower yields are also filtering through into the real economy. As MarketWatch reported last week, the 30-year fixed-rate mortgage averaged 6.35% as of Sept. 5. That rate was unchanged from the previous week, but remained substantially below where it was a year ago at 7.12%, according to data released by Freddie Mac.
It's also worth noting that most global central banks have only delivered 25-basis-point rate cuts over the past few months, suggesting that there doesn't appear to be "widespread alarm" at the current state of the global economy, Allen wrote.
"Although speculation has mounted that the Fed might deliver a 50-basis-point rate cut, it is notable that the other central banks in the advanced economies haven't yet cut at that speed," he said. "The fact that others like the European Central Bank have only moved in 25bp increments suggests they are not viewing this as a situation that requires a rapid readjustment for now."
Fed-funds futures traders now see a 73% chance the Fed will cut its key interest rate by 25 basis points at its Sept. 17-18 meeting on Monday despite a weaker-than-expected rise in August nonfarm payrolls reported on Friday, according to the CME FedWatch Tool. However, Wednesday's consumer-price index for August may end up being the deciding factor as to whether policymakers will deliver a bigger-than-usual, 50-basis-point rate cut next week.
See: Investors renew focus on inflation data as Fed weighs size of expected September rate cut
Additionally, Allen said it's sometimes "hard to trust" some of the leading economic indicators given their weak track record in the current "post-COVID economic cycle."
"From the perspective of economists, one difficult aspect of this cycle is that traditional leading indicators have not behaved as expected," he wrote.
"There's been a lot of debate as to why this might be, and whether the post-COVID economy is behaving differently somehow. For example, perhaps consumers were cushioned by the pool of excess savings built up in the pandemic. But whatever the reason, this shift in how the economy has behaved relative to prior cycles is making it more difficult to rely on these leading indicators," Allen added.
U.S. stocks were higher on Monday afternoon as the three benchmark indexes attempt to recover some of their steep losses suffered last week. The Dow Jones Industrial Average DJIA was rising over 600 points, or 1.5%, while the S&P 500 and the Nasdaq Composite COMP were each up 1.3%, according to FactSet data.
-Isabel Wang
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(END) Dow Jones Newswires
September 09, 2024 13:28 ET (17:28 GMT)
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