U.S. stocks rebounded on Monday after their worst week of the year — and one Deutsche Bank strategist believes investors shouldn’t overstate concerns about an economic slowdown and that recent market volatility may be unnecessary.
“We should not overstate the magnitude of this, nor should we overstate the magnitude of the market’s decline last week, which was driven primarily by a small group of stocks,” Deutsche Bank macro strategist Henry Allen said in a note Monday.
The S&P 500 fell 4.3% in the first week of September, but Allen noted that the decline was led by a handful of large tech stocks. The group of companies known as the "Magnificent Seven" fell 5.4% last week, according to FactSet data.
“Even before this sell-off, we knew September was a seasonally weak month and that stocks tend to struggle when they are close to U.S. elections,” Allen said.
Moreover, a closer look at U.S. labor market data suggests economic conditions are not as gloomy as some employment reports might first appear.
For example, the number of Americans applying for unemployment benefits fell slightly to 227,000 in the week ended August 31, hitting an eight-week low. The more timely labor market indicator, weekly initial jobless claims, has fallen in recent weeks, Deutsche Bank strategists said, adding that the four-week average is now at a 12-week low of 230,000 and has been "significantly below" the peak in mid-2023.
What’s more, expectations that the Federal Reserve is poised to start cutting interest rates this month “are already starting to have an impact,” Allen said, adding that even before the Fed actually cuts rates, “the prospect of lower rates is helping to ease the overall tightening of financial conditions.”
For example, the 10-year Treasury yield was 3.71% on Monday afternoon, hovering near its lowest level since June 2023.
The effect of lower yields has also begun to filter through to the real economy. Data released by Freddie Mac showed that as of September 5, the average 30-year fixed-rate mortgage was 6.35%. This rate was the same as the previous week, but much lower than 7.12% a year ago.
It’s worth noting that most central banks have only made 25 basis point rate cuts in the past few months, meaning there doesn’t appear to be “widespread panic” in global economic conditions right now, Allen wrote.
"While there is speculation that the Fed may cut rates by 50 basis points, it is worth noting that other developed economy central banks have not yet cut rates at such a pace, and the fact that some, like the ECB, have only cut by 25 basis points suggests that they do not currently see this as a situation that requires a quick adjustment," he said.
Fed funds futures traders on Monday saw a 73% chance of a 25 basis point rate cut at the Fed’s Sept. 17-18 meeting, despite a weaker-than-expected August nonfarm payrolls gain on Friday, according to CME’s FedWatch tool. However, Wednesday’s release of the August consumer price index could ultimately determine whether policymakers take a bigger 50 basis point approach to rate cuts.
Additionally, Allen said it’s sometimes difficult to trust these leading economic indicators given their poor track record in the current “post-pandemic economic cycle.”
“One of the difficulties of this cycle from an economist’s perspective is that traditional leading indicators have not behaved as expected,” he wrote.
Allen added: “There is a lot of debate about why this is the case and whether the post-pandemic economy is different in some way. For example, consumers may be cushioned by excess savings accumulated during the pandemic. But whatever the reason, the shift in the economy’s behavior relative to previous cycles makes it more difficult to rely on these leading indicators.”
Article forwarded from: Jinshi Data
