Stocks Edge Higher in Run-Up to US Inflation Data: Markets Wrap – Yahoo Finance

August 12, 2024

(Bloomberg) — Stocks struggled to rise as traders awaited a key inflation reading that will help shape prospects for the Federal Reserve’s next steps.

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Stocks edged lower after rebounding from Monday’s market sell-off that rocked trading around the world. The Consumer Price Index appears to have edged up in July, but the annual reading is likely to continue rising at a modest pace. The recent easing in price pressures is giving Fed officials more confidence to start cutting interest rates and refocus their attention on a labor market that is showing increasing signs of slowing.

For Chris Larkin of Morgan Stanley’s E*Trade, the data comes at a critical moment for markets. In just a few weeks, he said, conversation has shifted from whether the economy has slowed enough to concerns that it may be “stuck in the mud.”

“Investors will be hoping the numbers land in that sweet spot – calm enough for no one to doubt the possibility of a September rate cut, but warm enough to stave off the recession fears that have rocked markets recently,” Larkin said.

During the latest turmoil, investors cut their allocations to equities at the sharpest pace since the pandemic began, according to Deutsche Bank.Goldman Sachs Group Inc.’s David Kostin noted that analyzing past growth scares suggests that stock correlations and volatility “will only gradually return to ‘normal.’”

“If economic fears ease, the recent sell-off presents an opportunity to buy stocks with sound fundamentals at bargain prices,” he wrote.

The S&P 500 is hovering around 5,335. The Cboe Volatility Index (VIX) is fairly stable at around 20. This comes after an unprecedented spike last week, raising questions about whether the index is “exaggerating” stress.

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The yield on the 10-year Treasury note was little changed at 3.93%.

The twin blows of economic uncertainty and weak corporate earnings forecasts are likely to cap stock market gains, according to Morgan Stanley’s Michael Wilson.

The strategist, who was one of the most bearish on U.S. stocks until last year, said he expects the S&P 500 to trade in the 5,000 to 5,400 point range as macroeconomic data does not provide a clear signal in the near term.

The stock market’s risks and rewards remained mixed over the summer, amid weakening corporate activity and downward earnings revisions, according to strategists at JPMorgan Chase led by Mislav Matejka.

“The Fed will likely begin to cut rates, but these cuts may not lead to sustained rate hikes as they may be seen as reactive and reactive,” they wrote.

Investors will have a brief opportunity to buy into dips in U.S. stocks later this month as selling pressure from systematic funds eases and companies increase share buybacks, according to Goldman Sachs Group Inc.’s Scott Rabner.

“This will likely be my final bearish forecast for equity markets in August as the worst of the August equity supply/demand mismatch is coming to an end,” Rubner wrote in a client note.

At least one indicator suggests that last Monday’s drama looks more like a minor collapse than a harbinger of something worse to come.

Consider the Chicago Board Options Exchange Volatility Index and the option-adjusted spread on the Bloomberg U.S. Corporate Bond Index. Based on their long-term relationship, a VIX closing near 39 a week ago should have equated to 3.5% of the corporate bond spread. However, the VIX ended significantly lower at around 1.32%.

The discrepancy between the two suggests the recent sell-off is technical, not a sign of economic doom, according to Bloomberg Intelligence strategists Christopher Cain and Michael Casper.Indeed, such unusual divergences have led to above-average stock-market returns over the next three to six months in the past.

Tom Essaier of the Sevens Report said he doesn’t believe fundamentals have deteriorated enough to justify risk aversion or reducing exposure to equities and risks, but he would also caution against ignoring the recent uptick in volatility.

“Many of the articles I read over the weekend explained that the recent volatility is just a typical backlash in an up-trend market,” Essaie said. “As such, I continue to recommend investing in defensive sectors and volatility minimizing funds.”

Company Highlights:

B. Riley Financial is facing a widening U.S. investigation into whether it gave investors an accurate picture of its financial situation amid a series of losses and a falling share price.
JetBlue Airways has begun selling $2.75 billion in bonds and loans backed by its loyalty program to bolster reserves and raise funds for general corporate purposes.
Vestas Wind Systems A/S warned about its full-year profit outlook, dealing a blow to the company’s efforts to reverse heavy losses of recent years.
Starboard Value, an investment firm with a history of activist investor relations, reportedly owns shares in Starbucks.
Hawaiian Electric Industries Inc. has estimated losses of $1.7 billion from liabilities stemming from one of the deadliest wildfires in U.S. history and issued a going concern warning.

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