Is the US economy and stocks stalling?

Recently, the stock market has once again shown signs of breathing, while bonds have remained almost unchanged. The S&P 500 index fell 0.5%, causing the index to fall 0.8% from its historical high. The "Big Seven" consisting of Microsoft, Meta Platforms, Amazon, Apple, Nvidia, Alphabet, and Tesla performed poorly last week, but have risen by 24.9% so far this year. In contrast, the S&P 500 index rose 11.3%.

Firstly, recent weak economic data in the United States has led to the Federal Reserve Bank of Atlanta predicting a decrease in GDP growth rate to 2.7% in the second quarter. This weakness occurred after the GDP was lowered to 1.3% in the first quarter, but the specific data is better than the overall data. For crucial American consumers, signs of price weakness have emerged. Recent trends and retailer earnings indicate that low-income consumers are being squeezed by the cost of essential goods, while high-income consumers are becoming more price conscious. The phenomenon of consumers being squeezed is reflected in the poor performance of non essential consumer goods stocks relative to the S&P 500 index since late April.

Secondly, compared to the performance of cyclical stocks with higher economic sensitivity and defensive stocks with lower economic correlation, there is no sign that economic activity is about to decline significantly. Although stocks in non essential consumer categories have performed poorly, stocks in essential consumer or healthcare categories have not shown sustained excellent performance. If the market senses the possibility of significant economic weakness in the short term, the performance of bank stocks is also likely to be poor. The economic cash level data for April has not yet shown any signs of pressure. The statistical data does not indicate the pressure faced by low-income families, but it indicates that cash levels are still sufficient and higher than before the pandemic. Evidence suggests that consumer spending and credit levels are returning to pre pandemic normal levels, rather than about to collapse.

In addition, earlier this year, the growth rate of the US economy was lower than the initial reported level. The decline in housing sales based on contract signing far exceeded the expectations of economists. This week, mortgage interest rates have slightly increased, pushing the average interest rate back to the psychological threshold of 7% or above. After the US government released the latest data on economic growth in the first quarter, the yield of US treasury bond bonds fell, which also showed that consumer spending was lower than previously expected. The yield of benchmark 10-year US treasury bond bonds fell below 4.6%. The released economic data shows that the US economy has not rebounded and is struggling under the pressure of the highest interest rates in over 20 years. Although indicators indicate that American consumers are feeling some economic pressure, this also indicates that high borrowing costs will eventually decrease.

Furthermore, after the slowdown in inflation stalled in the first quarter, signs of inflation stagnation have raised concerns that the Federal Reserve may raise interest rates again this year or not cut them at all. The latest GDP data also shows that the inflation rate was lowered in the first quarter, including an indicator that excludes volatile food and energy prices. This also helps to enhance the reasons for interest rate cuts.

In summary, due to the optimistic inflation data and weakened economic growth expectations, the market currently expects a 60% probability of the Federal Reserve cutting interest rates in September. Federal funds futures expect the Federal Reserve to cut interest rates by 1.5 basis points in 2024. Although recent data has intensified concerns about potential difficulties for American consumers, other indicators have not confirmed concerns about imminent dangers. This looks more like the continuation of the normalization trend after the COVID-19 epidemic, while the labor market is weak. Consumer necessity and defensive industries such as healthcare have not seen a surge in purchases, indicating that an economic slowdown will not significantly increase the risk of recession in the short term. The slowdown in economic growth and labor market may provide the Federal Reserve with space to start lowering short-term interest rates, thereby increasing the possibility of a soft landing.