The US economy has for a long time shrugged off the gloomiest forecasts. But recent economic indicators are starting to show that the US Federal Reserve’s very restrictive monetary policy is beginning to weigh on growth. Purchasing managers’ indexes have shown that the manufacturing sector is still slowing. And July's employment figures were also less upbeat: job creation is running out of steam and unemployment has risen to 4.3% from 3.5% a year ago. These lacklustre figures have worried investors. What started as a normal sector rotation after several months of gains recently turned into a much sharper stock market correction. On Wall Street, the broad index is now down 6% on the all-time high it reached in mid-July. And the decline has been much greater among growth stocks.
And there have also been sharp declines on stock markets outside the US in recent days. In addition to the highly tense geopolitical environment, investors are concerned that the Fed is not keeping up with economic developments and has waited too long to cut interest rates. It’s not uncommon for investors to become jittery in the lead-up to a change in monetary policy. And it does seem that the Fed is on the verge of cutting rates – inflation has eased, so it has plenty of room to loosen monetary policy and boost the economy. The Fed will almost certainly begin lowering interest rates at its September meeting, with more cuts to follow this year and next.
And the Fed isn’t the only one carrying out rate cuts – several European central banks, including the Swiss National Bank, the European Central Bank and the Bank of England, have already begun, and will continue, this process. It is this synchronised easing of monetary policy that makes the current correction different from the others we’ve seen since 2022 and that leads us to believe it will be short-lived. What’s more, the sharp rise in volatility and the steep decline in sentiment indicators suggest that much of the downturn is now behind us and the markets will soon start to pick up again.
The US stock market consolidation, which had seemed to be over, picked up pace last week as panic spread among investors. Stocks broke below various technical support levels on the S&P 500 and the Nasdaq, the leading tech index. The consolidation – this year’s second decline of more than 5% – came as no surprise given the parabolic rise in certain growth stocks in recent months, and the advantage is that some stocks are no longer as overvalued as they were at the start of the summer. It’s hard to gauge when this profit-taking will be over, but since the US economy is at no real risk of recession, it’s safe to say there’ll be plenty of buy opportunities over the next few trading sessions.
Gold prices were up by more than 2% over the week, returning to recent highs thanks primarily to the decline in long-term interest rates. In the current uncertain environment, gold is being buoyed by its safe-haven status.