Wall Street’s Finally Flipping Bearish

US stocks took a hit on Friday, with the S&P heading for its worst week since the crash of Silicon Valley Bank in March. The S&P fell 0.5% through noon, splitting the difference between the Dow (-0.4%) and Nasdaq Composite (-0.6%) as traders wondered if the market’s three-month rally could finally be over.

Eschewing stocks, investors are increasingly looking for safer places to put their money. Namely, bonds and the US dollar. Yields fell today as long-term Treasurys rallied. This came after a slew of rate hikes and hawkish remarks from international central bankers, who stirred up fears about global economic growth over the last week.

Dow stocks continue to underperform through today’s trading session as a result. The index’s four-day slide is the longest the Dow has seen since a five-day drop that ended on May 25. Both the S&P and Nasdaq Composite managed to end higher on Thursday, breaking a three-day losing streak.

The Nasdaq Composite is similarly on track to break its longest streak of weekly gains since 2019. Worries that interest rate increases might hurt global economic growth were dragging down world stocks. This follows rate hikes in the UK, Switzerland, Norway, and Turkey on Thursday, and similar moves by Canada and Australia earlier this month.

New data this morning showed that business activity in Europe slowed down in June, which markets saw as a sign of what’s coming in the US. The S&P Global US services index dipped in June, hitting a two-month low, and the manufacturing index dropped to a five-month low.

“US stocks are sliding as the global growth outlook continues to deteriorate following soft global PMI readings,” said Oanda chief strategist Edward Moya.

“The risk of a sharper economic downturn is greater for Europe than it is for the US, so that could keep the dollar strong in the short term.”

With banks around the world planning to raise borrowing costs to control inflation, analysts are looking at what higher interest rates might mean for the economy and stocks. Wall Street banks are warning warned that valuations for the S&P and Nasdaq Composite are once again looking too high.

The S&P 500’s price-to-earnings ratio based on projected corporate earnings over the next 12 months is just below 19, according to FactSet, which is higher than the five-year average.

The Federal Reserve decided to leave interest rates as they were in June. However, Chair Jerome Powell said in Congressional testimony this week that senior Fed officials are leaning towards raising rates “a couple of times” later this year.

Ryan Belanger, founder and managing principal at Claro Advisors, thinks the market’s rally might be getting ahead of itself.

“The market is too confident that the Federal Reserve can engineer a soft landing and it would be wise for investors to reduce exposure to stocks,” Belanger said.

With the S&P 500 down nearly 1.5% for the week, stocks are heading for their biggest weekly fall since March 10, according to FactSet data.

This comes after a rally in the market, so some people think this might be a healthy pullback. The S&P 500 rose for five weeks straight up until June 16, its longest winning streak since November 2021, while the tech-heavy Nasdaq had an eight-week run of gains, its longest since March 2019.

“Investors are definitely exhibiting the renewed fears of a US recession, as well as a global recession,” said Greg Bassuk, CEO of AXS Investments.

“Inflation levels remain elevated and Federal Reserve policy definitely remains the investor narrative.”

On the other hand, US Treasury Secretary Janet Yellen was optimistic this morning. She said in an interview with Bloomberg that the risk of a recession in the US is lower “because look at the resilience of the labor market, and inflation is coming down.”

Yellen also thought that inflation wouldn’t be a problem in the first place. More recently, she said that the US would default on its debts on June 1st, about a week before the government’s actual “X-date” of June 8th.

Wall Street probably has the better take on the situation. And, with overall market sentiment beginning to sour, it seems that retail investors are starting to take the same position, too, with stocks still highly elevated on the year.


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