The S&P500 continues to oscillate near its all-time highs, without managing to overcome them. What is it waiting for? Probably to understand what the new economic context will be.
After a long period of tight monetary policy, the Federal Reserve is approaching a turning point: its first interest rate cut. This event is eagerly anticipated by investors due to its significant impact on the US economy and global financial markets.
But what can we expect after this rate cut? What is the historical precedent and outlook for the S&P 500?
Will the cuts cause the S&P500 to collapse?
Historically, Fed rate cuts during periods of decelerating economic growth have nevertheless been welcomed as a positive development by financial markets. In the past, such cuts have often preceded rallies for the S&P 500 and other stock indices. This is mainly because lower borrowing costs tend to stimulate investment and consumption, thus fueling economic growth.
However, not all rate cuts are created equal. If the Fed were to lower rates in response to a significant economic deterioration, such as an impending recession, the impact on markets could be less positive. In this case, a rate cut could be perceived as a warning signal, indicating that the Fed sees significant risks ahead. However, at the moment, most analysts expect the rate cut to be preemptive rather than reactive, which could suggest a so-called "soft landing" of the economy.
What to expect from the US economy?
The US economy is currently in a phase of decelerating but still strong growth. Inflation, measured by the Personal Consumption Expenditures (PCE) price index, is one of the main indicators used by the Fed to make monetary policy decisions. The annualized PCE increase over the past three months has fallen to 1.8%. This decline in inflation could indicate that price pressures are easing, giving the Fed room to ease monetary policy without fear of further fueling inflation.
On the labor front, there are signs of weakening. The Bureau of Labor Statistics recently revised the number of jobs created in the year ending last March by about 800,000. While the labor market remains relatively strong, with historically low unemployment, this slowdown in job creation suggests that the economy may be more fragile than previously thought.
What to Expect from the S&P500?
From a technical perspective, the S&P 500 is at a crucial juncture. The RSI on the daily timeframe remains in neutral territory, not highlighting any particular short-term directionality. After the V-shaped recovery of the last few weeks, the price of the index has failed to overcome the previous highs, positioned just above 5600 points.
A bullish breakout of this level could be interpreted by many as a positive signal. Trades are accumulating in the upper part of the chart, but it is not clear what the underlying direction of the index could be. The uncertainty comes from the current economic context: will there be a soft landing or a hard landing? This uncertainty seems to be holding back the price, which is unable to overcome the previous highs as if the market was waiting for a response from central bankers.
Original article published on Money.it Italy 2024-09-04 15:09:08. Original title: L’S&P 500 potrebbe crollare con il primo taglio dei tassi Fed?
