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Navigating Economic Uncertainty and Market Momentum in 2024
Dr. Mahnoosh Mirghaemi
September 24, 2024
7 min read
The U.S. stock market closed the week on a strong note, with the S&P 500 rising 0.5% on Friday, culminating in a 4% gain for the week. Investors are grappling with significant macroeconomic shifts, the Federal Reserve’s upcoming policy meeting, and concerns surrounding a potential U.S. government shutdown. This week’s market action reflects a delicate balance between optimism over potential Federal Reserve easing and trepidation regarding the broader economic outlook.
Despite persistent volatility and mixed economic data, U.S. equities continue to defy expectations, with the S&P 500 now up for five consecutive sessions. The index’s robust 4% weekly gain has rekindled investor optimism that the Federal Reserve might deliver a significant rate cut at its upcoming policy meeting. Tech stocks were standout performers, with the sector posting over a 7% increase for the week, leading the broader rally.
What’s particularly noteworthy is the market’s resilience in the face of only moderately positive inflation data. Even though inflation remains higher than the Federal Reserve’s target, investors are betting that the cooling economy will push the Fed toward a more accommodative stance.
The Federal Reserve’s September meeting is set to be a critical event, with market participants closely watching whether the central bank will opt for a 25 basis point cut or a more aggressive 50 basis point reduction. JPMorgan Chase & Co. economists have reiterated their forecast for a 50 basis point cut, citing ebbing inflation and softening labor market data. According to JPMorgan’s chief U.S. economist Michael Feroli, the Fed should recalibrate its policy rate to reflect shifting economic risks, recommending a 50 basis point cut to adequately support the economy. However, uncertainty remains. While JPMorgan maintains confidence in a larger cut, Fed fund futures currently reflect a 30% probability of a 50 basis point reduction, indicating that a 25 basis point cut remains the most likely outcome. The Federal Reserve will also update its quarterly projections, with some economists forecasting further rate cuts in 2024 and 2025 as the economy continues to moderate.
A critical factor adding to the market’s uncertainty is the potential for a U.S. government shutdown by September 30. A shutdown would not only disrupt federal operations but could also delay key economic data releases, including the Consumer Price Index (CPI) and nonfarm payrolls. These reports are crucial for the Federal Reserve’s decision-making process, and their absence could leave policymakers—and investors—in the dark regarding the health of the economy. Should this occur, it could tip the scales in favor of a larger rate cut as the Fed may opt for a precautionary approach to counterbalance the data gap.
European equity markets mirrored the U.S. rally last week, despite concerns over the region’s economic outlook. The European Central Bank (ECB) made its second rate cut of the year, citing growing risks to the European economy. Money markets are now predicting another 150 basis points of rate cuts by the end of 2025, underscoring the challenges facing the Eurozone. Weak demand, particularly from China, continues to weigh on European manufacturers, and the ECB’s policy shift reflects an acknowledgment of these downside risks. European automakers, in particular, remain under significant pressure, as noted in the following sector analysis.
The rally in U.S. equities has been largely driven by a narrow group of sectors, with technology and mega-cap stocks showing outsized gains. Chips, high-beta, and momentum stocks were the primary beneficiaries, while low-volatility stocks, typically favored during periods of market stress, have shown signs of underperformance. This suggests that the extreme defensive positioning seen earlier in the year is beginning to unwind, with investors more willing to take on risk in select sectors. However, there are concerns about the concentration of gains. Much of the stock market’s recent performance has been driven by a handful of large-cap tech companies, raising fears of a narrow rally that may not be sustainable in the long term. The options market reflects ongoing caution, with investors continuing to seek downside protection through hedging strategies. High skew and implied volatility remain elevated, signaling that market participants are bracing for further turbulence, even as equities push higher.
The automotive sector remains a notable laggard in the global equity markets. The Stoxx 600 Autos & Parts index has plunged 24% since its April peak, driven by weak demand, particularly in the key Chinese market. Volkswagen, BMW, and other European carmakers are grappling with a challenging mix of margin pressure, sluggish sales, and increasing competition from Chinese electric vehicle manufacturers. The sector's dependence on Chinese demand—over one-third of BMW, Mercedes-Benz, and Volkswagen sales come from China—further complicates the outlook, especially as trade tensions between China and the European Union escalate. Adding to the sector’s woes are looming EU emissions regulations set to take effect in 2025, which could result in billions of euros in fines for automakers failing to meet stricter environmental standards. Volkswagen, for instance, is considering factory closures in Germany, a testament to the industry’s deep-seated challenges. Despite these struggles, some analysts believe select automakers, like Mercedes-Benz and Porsche, could rebound in the coming quarters due to supply chain improvements and attractive valuations.
The upcoming week is pivotal, as the Federal Reserve’s rate decision will significantly impact market sentiment. While the market is mostly pricing in a 25 basis point cut, the possibility of a 50 basis point cut remains very much alive, especially given the uncertainty surrounding U.S. economic data and the risk of a government shutdown.
Investors should prepare for continued volatility. Should the Fed opt for a larger rate cut, we could see a relief rally across equities, particularly in sectors sensitive to interest rates, such as technology and real estate. However, a smaller cut, or no cut at all, could lead to market disappointment and trigger a selloff, especially given the high expectations that have been built into current stock prices.
