Are US Stock Markets In Trouble?

Are the US Stock markets in trouble? 

The easing cycle from the Federal Reserve is upon us, the market is pricing at least 125 basis points of cuts by the end of this year with the vision of being in and around 3% by 2026. 3% interest rates could be the new neutral rates going forward. 

Us stock markets such as the S&P500 are approaching all time highs and they could be about to break higher, if all goes to plan!

The statement from the Federal Reserve Chairman is going to be what’s important in this meeting. The debate between 25 and 50 basis points is an interesting one, but the context surrounding the cuts will be crucial. Does the Fed cut and cut aggressively because they can and because it’s a win for combating inflation and controlling a cooling labor market. 

Remember the mandate for the central bank is price stability a.k.a keeping inflation at manageable levels and full employment. 

However if they cut rates because they need to protect the labor market and feel that it is fragile then this could be something that is bearish for US stock markets going forward. 

Although what does this tell us about inflation, is the Fed prioritizing the stock market over inflationary pressures. If we think of what cuts are, they are inflationary. Why? Because they can influence more credit into the economy. Credit is income for an economy and therefore can create growth, in employment and other aspects. 

So why could the stock markets be in trouble? 

First let’s discuss the similarities between the market today and in 2007. The price action has been very similar, price rallied before the rate cut and after the market fell into a recession. Now times are different and we don’t have all the situations with banks failing and hedge funds closing being over leveraged in this US Subprime debt. 

An interesting chart I found which includes the ‘Sahm’ rule. An indicator developed by Claudia Sahm, an economist formerly of the Federal Reserve. The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.

When we combine this indicator with the Fed Funds rate and then look at 2007, we have similar movements to back then. 

Also the VIX or volatility Index can seasonally rally this time of year and that typically would see equites bearish and JPY and CHF stronger.

However the market will tell us what’s really going on, if the S&P500 prices trade through the all time highs and hold above them then it’s more likely the market is taking this positively and I would expect a continuation of the risk on rally. 

Alternatively, if the price breaks through the highs and then closes back below the lows I would be interested in seeing some equity downside.

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About The Author

Jonathan Kibbler

Jon Kibbler, our Senior Market Analyst, boasts over a decade of trading experience. He specializes in dissecting the intricacies of financial markets and sharing his expertise with precision. Jon’s insights have been featured at renowned events and platforms like Coindex, Forex Analytix, and Forex.com.

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