Next week hints at short-lived debt deal relief as jobs report looms
As the nation inches closer to an agreement on raising the debt ceiling, Wall Street analysts are predicting that the market may have already factored in the news and that any positive gains may be fleeting. Amidst the frenzy surrounding Nvidia’s robust second-quarter forecast and the buzz surrounding artificial intelligence, investors are keeping a close eye on next Friday’s reading on nonfarm payrolls for the month of May and the Federal Reserve’s upcoming policy meeting. There is concern in trading circles that the economy may be too resilient, and that the Fed may elect to lift rates another quarter point, either during their June or July meeting. Meanwhile, there is growing anxiety over the fact that so many stocks are failing to gain traction, leading to a decrease in consumer staples, materials, healthcare and utilities. Despite the S&P 500 being up 9.5% so far this year, there are only a few stocks that are faring well.
However, with June being historically a weak month for stocks, with tepid performance in the DJIA, S&P 500, Russell 1000, and Russell 2000, investors are uncertain about the market’s overall trajectory.
Jay Hatfield, CEO at Infrastructure Capital Management, has noted that the market has been quiet as of late, leading investors to rely on political news, which is a risk for the market.
“Despite the market’s upside over the last month and change, the strength under the surface has actually deteriorated,” said Liz Young, head of investment strategy at SoFi.
Meanwhile, economists are expressing cautious optimism, with GDPNow model estimates for second-quarter real gross domestic product growth standing at 1.9%. The CME FedWatch Tool shows a nearly 67% chance that the Fed will hike another quarter point in June, and a 25% chance that the rate will be 5.50% to 5.75% by the end of the July meeting.
FAQs:
What is the debt ceiling and how does it affect the stock market?
The debt ceiling is a statutory limit on the amount of money that the US government can borrow. Historically, when debates about the debt ceiling escalate, they can have an impact on the stock market. In the past, concerns over the inability to raise the debt ceiling led to a government shutdown and caused a dip in the market. However, as discussions in Washington are looking more positive, this potential impact on the market may be mitigated.
What is the Fed’s role in the stock market?
The Federal Reserve is responsible for setting monetary policy, including interest rates, inflation, and the supply of money. Their decisions can have a significant impact on the stock market, as changes in interest rates can shift investment strategies and cause stock prices to fluctuate.
Why is June historically a weak month for stocks?
June is typically a weak month for the stock market due to the fact that it follows the end of first-quarter earnings season. As a result, the number of companies reporting news tends to decrease, leaving investors reliant on political news, which can be a risk for the market.
What is the CME FedWatch Tool?
The CME FedWatch Tool is a tool that uses futures prices to estimate the probability of a rate increase or decrease by the Federal Reserve. It is used by investors to determine the likelihood of a rate hike, and therefore the potential impact on the stock market.
As jobs report approaches, next week suggests temporary debt deal relief
As discussions surrounding the nation’s debt ceiling reach a resolution, analysts on Wall Street predict that any market euphoria that may result from the situation has already been priced in, or will only prove fleeting over the next holiday-shortened, four-day trading week. With Nvidia’s strong second-quarter forecast and the growing enthusiasm surrounding artificial intelligence also showing signs of dissipating, attention is increasingly turning to next week’s reading on nonfarm payrolls for May and the Federal Reserve’s next policy meeting on 13-14 June. With the economy proving to be so resilient lately, and inflation slowly but steadily decreasing, some are predicting that the Fed may lift interest rates another quarter point, either at the June meeting or at the following meeting in July. Meanwhile, stocks continue to falter, and the latest fear among traders is that the number of stocks trading above their 200-day moving average has been decreasing since mid-April. Despite the seeming strength on the surface, low performances in consumer staples, materials, health care, and utilities stocks suggest broader market weakness. Historical analysis suggests that June is a seasonally fraught month for stocks, and remains the 11th strongest month of the year for the Dow Industrials, the 9th strongest for the S&P 500 and the Russell 1000 and the 7th strongest for the Russell 2000. The market trend is expected to remain cautious and sideways, potentially resulting in a pullback or correction over the weak summer months, and analysts suggest remaining wary of the worst two months of the year, August and September.