The US stock market, which has been enjoying a prolonged winning streak, recently experienced some fierce ups, downs, and ups. The loss of the US 500 Index from last week is already caught up, till the next time it falls. As an investor it is very hard to predict the future, and even harder to act upon it. Federal Reserve Chairman Jerome Powell's suggestion of potential rate hikes added to the market's uncertainty, which further impacted market sentiment. Volatility increases even more.
Where the current volatility comes from: the US labor market
Powell's comments on potential rate hikes triggered concerns among investors and weighed on market sentiment. Powell's remarks hinted at the possibility of an even more 'aggressive' monetary policy stance in response to rising inflationary pressures. The market interpreted this as a sign that the battle against inflation is still far from over. A wake-up call it might seem.
The volatility overall is being triggered by economic conditions, monetary policy decisions, and market expectations, but also by the hawkish policies of national banks. Powell states a strong labor market is generally the blame for the last hike. The situation of the last years was a splendid economic flower but comes with an expiration date. With low unemployment rates and rising wages, individuals and businesses may have more disposable income and confidence in their financial situation. This can result in increased borrowing and loan demand, as people are more likely to seek financing for various purposes such as home purchases, business expansions, or personal investments. As the demand for loans rises, banks may respond by raising interest rates to manage the increased lending risk and ensure profitability.
Rowan Rozemond, Head of Global Investor Relations at DHF Capital S.A., foresees a recession at the end of this year or the start of the next. "At this moment the losses of the last period are already caught up. The cyclic movements of up and downs, already pointed out by the FED, are based on the job market. While companies cannot always pay more wages but raise the prices, consumers find themselves trapped in a certain maximum spending position due to inflation. The need for employment and spending decreases and a recession is born. This curve will soon come."
When wages rise, it can contribute to overall increases in consumer spending, driving up demand for goods and services. This increased demand can potentially lead to higher prices and inflationary pressures in the economy. To mitigate inflation, central banks may respond by raising interest rates, which can influence banks to increase their lending rates accordingly. It is expected that the hawkish policy will endure for at least two meetings or six months. As companies have to pay more for their loans, the economy will cool off naturally. In the end, the interest rate increase would "ultimately pull the U.S. into at least a shallow recession, as volatility triumphs."
Annual Rebalancing of Russell Indexes
The recent market volatility also coincided with the annual rebalancing of the Russell indexes. This rebalancing process involves adjusting the composition of the indexes to reflect changes in market capitalization and company rankings. As a result, portfolio managers and institutional investors often need to buy or sell shares to align their holdings with the new index weights. The increased trading activity during this period can impact market dynamics and contribute to short-term volatility.
Risk assets, valuable for the recession on the move
Rozemond thinks that the hammer of the upcoming recession will fall the hardest in the area of risk assets. 'We will notice that FED withdraws money from the economy like a milkshake. Despite the Chinese banks are loosening their interest policy a bit, it will not beat the sheer volume the FED puts into the game when it comes to hawkish policies in order to shrink their balance sheet. According to the FED, as they said it themselves, it is easier to break things and fix them, than be careful to prevent any damage."
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