Investors are facing an old problem with a new twist: Almost no one really knows where the U.S. economy is headed. In fact, economists and market watchers are having trouble even agreeing on where things are right now.
Faced with so much uncertainty, consumers and businesses are choosing to hold off until they have a better idea of how much the Fed is likely to cut interest rates in the coming months and what impact its policy changes will have on the economy.
That’s confusing investors and opens the door to potentially more volatility in the coming months, said Callie Cox, chief market strategist at Ritholtz Wealth Management.
Cox even coined a new term to describe this state of stagnation: the "Great Wait."
Take last Friday's jobs data, for example, where investors couldn't seem to agree on whether the report signaled a slow cooling of the economy or a deeper recession.
Cox said part of the confusion stems from the fact that companies don't seem to be taking much action. Hiring has slowed significantly, but at the same time, companies appear to be retaining existing employees.
Specifically, the pace of job creation in recent months has fallen to its slowest pace since 2020, based on the average number of new jobs added over the past three months. At the same time, layoffs have barely increased, based on weekly unemployment claims data. The latest Labor Department data shows that nearly 81% of Americans aged 25 to 54 have jobs, the highest proportion in two decades.
Consumers also appear to be stuck in wait-and-see mode, reluctant to change jobs or make major financial decisions like buying a home.
Cox noted that, with the exception of the period after the start of the coronavirus pandemic, the share of U.S. workers quitting their jobs fell this summer to its lowest level in six years.
Pending home sales hit an all-time low in July despite a drop in 30-year mortgage rates.
“We appear to have reached a point where interest rates are high enough and the economic outlook is bleak enough that average Americans and businesses have decided not to do anything,” Cox said.
However, investors seem to be jumping the gun and overreacting to every bit of economic data that shows signs of weakness.
"That said, it looks like Wall Street is tired of waiting," Cox said. "They've jumped right into recession, punishing every economic report that looks a little ominous."
Every sell-off so far has been followed by a wave of bargain hunting, and the latest bout of volatility in early September appears to be no exception.
Stocks recovered some of last week's losses as major U.S. stock benchmarks rebounded strongly on Monday, marking the S&P 500's worst week since the collapse of Silicon Valley Bank.
The choppy trading behavior is likely to continue into the fall until investors get a better idea of whether the feared recession is actually coming, Cox said.
Some believe the Fed’s refusal to provide specific guidance on how quickly it plans to cut rates has added to confusion and raised concerns that the central bank may have missed the best time to start easing policy.
But Mabrouk Chetouane, head of global market strategy at Natixis, believes there is good reason for such caution among senior Fed officials.
“It’s very important for the Fed to maintain that ambiguity because it’s the only way they can be completely free to do what they want,” Chetouane said. “Otherwise, the market might try to force them to act.”
The article is forwarded from: Jinshi Data