Happy Thanksgiving! As we celebrate and express gratitude, there is cause for optimism in the financial markets. Let’s explore the current state of the market, focusing on the positive aspects of the economy.
The financial markets currently buoyed by optimism, expecting a gradual economic downturn, mild geopolitical tensions, and stable risk premiums for bonds and equities. Nonetheless, any deviation from this hopeful scenario could lead to substantial market adjustments.
In the current market landscape, the retail and technology sectors are experiencing downturns. Notable companies such as Walmart (WMT), Cisco Systems (CSCO), Apple (AAPL), and Microsoft (MSFT) have seen their stock prices drop. The S&P 500 is oscillating within a tight range between 4,530 and 4,550, signifying the ongoing market uncertainty.
The market’s cautious mood is influenced by several factors:
- Rising Interest Rates: The Federal Reserve’s rate hikes, aimed at curbing inflation, are increasing borrowing costs for businesses, impacting their profit margins.
- Economic Data Concerns: Recent economic reports have stirred worries about a potential slowdown.
- Geopolitical Instability: Continued global conflicts are adding to the uncertainty in the global economy.
However, there are still reasons to be hopeful, such as the low unemployment rate and consistent consumer spending, which may support the market over the long term.
The market is currently balancing potential risks and rewards, with investors being cautious but also aware of long-term growth possibilities.
In other news:
- OpenAI Developments: Sam Altman’s reinstatement as CEO of OpenAI following his sudden departure last week has been a major talking point. Although AI is a crucial sector for future growth, investing in this area could be premature due to potential volatility. Microsoft, a significant player in OpenAI, might feel the initial impact of Altman’s return, but the partnership is expected to be beneficial in the long haul.
- U.S. Crude Oil Prices: U.S. crude oil prices have fallen by over 4% following OPEC’s decision to delay a key meeting regarding production cuts.
- U.S. Treasury Yields: As investors mull over the direction of interest rates and the broader economic outlook before Thanksgiving, U.S. Treasury yields have seen a decrease. The 10-year Treasury yield has hit its lowest point since September 20.
Additionally, mortgage demand is showing signs of recovery as interest rates decline, with a 3% increase in total application volume last week, as reported by the Mortgage Bankers Association.
Reviewing the U.S. economy’s performance, the GDP growth rates under recent presidents show:
- Donald Trump: 2.3%
- Barack Obama: 3.3%
- George W. Bush: 1.6%
- Bill Clinton: 3.8%
President Biden so far has an average annual GDP growth rate of 2.45%, surpassing Trump’s rate. This growth, despite significant interest rate hikes for inflation control post-COVID, suggests a likely soft landing for the economy.
The market is expected to see tax-loss selling, profit-taking, and strategic shifts. Investors should be cautious, especially with tax-loss selling, as the economy slows due to rising interest rates. The market’s resilience stems from optimism for a soft landing and minimal impact of global issues on the U.S. economy.
The market, primarily driven by the ‘Magnificent 7,’ these companies are Apple, Microsoft, Amazon, Alphabet (Google), Meta (Facebook), Tesla, and Nvidia. The market is expected to diversify beyond these dominant players as the broader S&P 500 begins to contribute more significantly. Investors are advised to focus on value with dividends and maintain liquidity for emerging opportunities. The market’s expansion beyond these key players reflects the economy’s drive towards innovation and productivity improvements. These innovations and improvements will begin to be apparent in many sectors. The stocks making improvements should be investigated and review for potential opportunities.
Key Points
- The market is anticipating a soft economic downturn and mild geopolitical tensions.
- Retail and technology sectors are experiencing downturns due to rising interest rates.
- Investors are cautious but aware of long-term growth possibilities.
- U.S. crude oil prices and U.S. Treasury yields as inflation worries start to subside.
- Mortgage demand is showing signs of recovery.
- The market is expected to broaden beyond the ‘Magnificent 7’ players so a focus on other value plays would be prudent.