Wary investors eye rising risks to US stock rally

Shaky markets: A monitor displays information about US interest rates at the New York Stock Exchange. Yields on US bonds are near 16-year highs. — AP

NEW YORK: A hawkish stance from the US Federal Reserve (Fed), soaring Treasury yields and a looming government shutdown are adding to a cocktail of risks that has spooked investors and clouded the outlook for US equities.

US stocks have slid more than 6% from their late July highs, and the past week has been particularly nerve-wracking for investors.

The Fed projected it would leave interest rates at elevated levels for longer than expected, sparking sell-offs in US stocks and bonds.

The S&P 500 tumbled 2.9% last week, its biggest weekly decline since March. Investors sold global equities at the fastest rate this year, with a net US$16.9bil leaving stocks in the week to last Wednesday, data from Bank of America (BofA) Global research showed.

The index is up 12.8% year-to-date.

“We’ve had resilient growth for the summer months but we’re running into a period where there’s significant risk to the economy,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

“Investors are seeing a reason to take risk off the table and that’s going to diminish some appetite” for stocks, he said.

Yields on the benchmark US 10-year Treasury, which move inversely to prices, stand near 16-year highs.

High Treasury yields dull the allure of stocks by offering investors an attractive payout on an investment seen as virtually risk free.

Market participants are also grappling with several potential threats to US economic growth, whose resilience this year has helped push stocks higher. Foremost is the challenge presented by higher rates, if the Fed follows through on its pledge to keep borrowing costs elevated as it seeks to decisively turn the tide on inflation.

“The Fed is overly confident in the soft-landing narrative,” said Brian Jacobsen, chief economist at Annex Wealth Management.

“A confident Fed is a dangerous Fed because it will ignore early signs of weakness.”

Other risks include high oil prices, a resumption of student loan payments in October and a government shutdown that is set to begin if lawmakers are unable to pass a budget by Sep 30.

Seasonal factors also look grim, at least for the near term. The S&P 500 entered what has historically been its weakest 10-day stretch of the year on Sept 18, according to BofA Global Research.

The index has historically fallen by 1.66% over the period when performance during the first 10 days of the month is below average, as it has been this year, the bank’s data showed.

“Seasonality shows nasty down days into October,” BoFA analysts wrote, noting however that declines could provide opportunities for dip buyers.

Meanwhile, a drawn out government shutdown could aggravate concerns over US government gridlock and send Treasury yields even higher. Early this year, lawmakers waged a protracted battle to raise the debt ceiling.

This drew a credit downgrade from ratings agency Fitch, analysts at Societe Generale wrote.

Higher yields could exacerbate the headwinds to stocks, which have struggled as yields surged over the past several weeks.

Of course, strategists’ metrics have shown there is plenty of cash on the sidelines to be deployed by investors looking to buy on weakness. Buyers would likely step in if the S&P 500 fell to 4,200, which is about 3% from current levels, said Keith Lerner, co-chief investment officer at Truist.

Such a decline would put the index at a 17.5 price to earnings ratio, in line with its 10-year average, he said in a report last Friday.

“We anticipate, at least initially, buyers would come in around this vicinity to help contain short-term weakness,” he said.

Adam Turnquist, chief technical strategist for LPL Financial, remained optimistic in a late Friday report even though most momentum indicators he tracks – including market breadth – have turned bearish.

He noted that the S&P 500 remained above its 200-day moving average and there have been few signs of investors fleeing to safety.“Overall, the market is down but not out,” he wrote.

“Pullbacks are entirely ordinary within the context of a bull market.” — Reuters

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