Dow Jones Industrial Average (DJIA) saw its tenth consecutive positive session on Friday (21 July 2023). Blue chip index only gained 0.01% by end of trading day on Friday. Therefore, market watchers see this closing as “suspenseful”. Several factors impact the performance of Dow Jones index, including but not limited to, earnings results, global macro data points, interest rates, inflation data, etc.
During afternoon, the US stock market saw some volatility as shares of big tech giants tumbled just before the closing bell. That being said, the blue-chip segment avoided losses and it saw small but critical upward tick. This has enabled to achieve the winning streak. The suspenseful nature of the market can be because traders continue to eye the crucial US Fed meeting. Higher volatility which was seen at the close can be influenced by expiration of options. Moreover, market watchers continue to have a more cautious approach, which is likely because of the anticipation of the FOMC meeting which has been scheduled in the next week.
What’s in store for Dow Jones for the next week?
Market seems to have already factored in 0.25% rate hike, and this will increase borrowing cost to 5.25%-5.5%. Now, this is the highest level since early 2001. For the next week, the market should get influenced by the Fed’s future plans. There is a belief that this rate hike can be the final hike in the cycle. Fed futures exhibit only a 16% probability of one more rate hike in September and the 30% probability of a hike by November.
As they say “It’s not over until and unless it’s over”, US Fed’s rate hiking war against inflation seems apt in a situation like this. The US Fed has left the interest rates unchanged in June. This happened for the first time in the preceding 15 months. However, it seems like the policymakers will not wait very long. Therefore, the policymakers will pick back up where they left off. If the officials announced a rate hike by another quarter point, this will mark their 11th total increase since March 2022.
This decision is expected to be announced even after investors have seen slowing down of inflation in June. Prices grew by 3% on the year-over-year basis, marking the slowest rise since August 2021. This marks a significant progress in comparison to the highs experienced in last summer. At that time, inflation soared 3x faster. In addition to this positive news, annual price pressures, excluding food and energy, slowed by the fastest pace after the US Fed started increasing the interest rates. Borrowing costs on loans like 30-year fixed-rate mortgage and home equity lines of credit are highest in over two decades. As the result, this has created some affordability challenges and has tightened the flow of credit to households. However, there are some silver-linings- yields at the nation’s savings accounts are highest in fifteen years.
Despite recession worries, equities continue to perform
Renowned economists continue to feel more hopeful regarding the economy tackling the downturn. Inflation eased in June and joblessness in the month declined, per the data showed by Labor Department. Normally, these 2 factors are inversely related. Even though the job growth in the month grew at the slowest pace since the ending of COVID-19 pandemic, employers were able to create enough jobs so that population growth can be met. As a matter of fact, the hiring is still faster in comparison to the pre-outbreak era in 2019.
As the recession talks continue, it seems that investors continue to ignore these discussions. This can be said because the S&P 500 was able to climb over 18% since the beginning of this year, and the tech-heavy Nasdaq jumped ~35%. Dow Jones Industrial Average has jumped ~6% this year.
This strong performance of the stock market is supported by the significant cooldown of inflation. This has bolstered the expectations that US Fed might bring price increases to the normal levels. Investors expect that this can be done without causing a severe downturn.
Wall street analysts believe that the enthusiasm about artificial intelligence (AI) gave the boost to big technology stocks. However, analysts have varying opinions regarding whether or not this blockbuster performance will last. While some analysts expect that the major fall is in the offing, others believe that there is still room for growth.
The U.S. economy proved to be more resilient in the face of aggressive series of interest rate increases by the US Federal Reserve. Increased possibility of the “soft landing” seemed to have cheered markets, as per the leading asset managers. They believe that the stock market has recognised that the US Federal Reserve is having some real progress against inflation.
Leading indices such as S&P 500 are weighted proportionately towards the largest firms. This index is made up mostly of renowned technology companies. These companies have posted better-than-average returns due to the AI fervour. Consequently, the performance of the overall index has also improved.
For example, shares of Google grew ~36% in value this year. This increase came after the tech giant unveiled its generative AI product, Bard, in February. Another tech major, Microsoft, saw its shares price climb by ~46%. This company owns a major stake in ChatGPT-maker OpenAI.
Looking ahead, money managers expect that the stock market performance will get impacted as and when the effects of central bank rate hikes take control. They believe that inflation might not return to normal levels as soon as investors hope.
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