The stock markets have already recorded their worst first half in the history books, which means that investors are now focusing on whether it would be possible for the US economy to avoid an economic downturn. This is in light of the commitment of the US Federal Reserve to continue increasing interest rates in the country in order to fight the worst inflation that has been seen in decades. Investors believe that the answer to this dilemma would have a significant impact on markets.
What is in store for stocks?
According to strategists, weak corporate earnings that are due later this month, combined with an economic slump, could drive the benchmark S&P 500 index almost 10% lower. The index has already shed 18% year-to-date and this would only compound losses.
But, there is a possibility that stocks could see a bounce if there is moderate inflation and the earnings week shows some solid increases in profits. Analysts said that investors were already prepared for a slowdown, but the question was how deep it will be.
Impact of US jobs data
On Friday, the possibility of an imminent downturn in the economy fell after the Labor Department disclosed that employers had hired a higher number of employees in June than expected. This provided the Fed with the ammunition it needs for further hiking up the interest rate by 75 basis points this month.
Market analysts said that the employment report of June shows that the economy is certainly not at the cusp of recession, much less already in one, and nor is it overheated. Therefore, there will be more volatility to come in the stock markets, as there would be speculation about the actions of the US Fed.
There is a lot of other data due later this month that would also provide clues about what to expect from the economy and how it will affect markets. In the next few weeks, companies will present their earnings reports for the second quarter. Plus, investors would also get fresh data, as the consumer prices for the month of June would be released on Wednesday.
Even though the Fed has reiterated that a soft landing is quite possible, but some investors think that the steep declines in the stock markets show that asset prices have already priced in some economic slowdown.
For instance, there has been a 23.6% fall in the S&P 500 since its January closing high. This is in accordance with a fall of 24% that the index has seen in previous economic recessions. Officially, recessions are announced in hindsight, as the National Bureau of Economic Research declares if the economic activity has declined significantly and spread out to other areas while continuing for several months.
As for economic forecasts, they have become rather rocky. According to economists, if stagflation were to occur, the S&P 500 index could fall 31% from its high in January. Already it is in a bear market and this news would not help.