Market Correction Stabilizing, But More Volatility Ahead: Experts Weigh In
New York, NY – Following a tumultuous period in the markets, experts are cautiously optimistic about a stabilizing correction, but warn of further volatility in the short term. The recent unwind of the "carry trade" – a strategy that involves borrowing money at low interest rates and investing it in higher-yielding assets – has reverberated across global markets.
Mike Santo, a veteran market analyst, emphasized that the correction came after "one of the strongest first halves at least for the US Equity Market that we’ve seen over many decades." He attributed the initial rally to optimism surrounding artificial intelligence and a general sense of complacency. "Global equities had already risen by about a third and the NASDAQ by about a half," Santo stated, highlighting the extent of the recent surge in valuations.
However, the correction is seen as "healthy" by many experts, particularly given the increasingly evident signs of a slowing US economy. While Europe and China had already shown signs of weakness, the US economy is now following suit.
Despite the stabilizing trend, Santo advises against expecting a smooth recovery. He predicts "choppy environments in the short term," as investors grapple with interest rate uncertainty and recalibrate their expectations.
"We’re still going to see I think some choppy uh environments in the short term as as as investors really start to calibrate and get more confident again about the direction of interest rates in the economy," said Santo.
While acknowledging the correction, Santo maintains that a full-blown bear market is unlikely. "There going to be some good opportun[ities]," he added, suggesting that the volatile market could present attractive entry points for savvy investors.
The NASDAQ’s multiple has dropped to around 24 times earnings, but Santo believes it may need to decline further to entice value investors. He points out that the US equity market broadly remains at the top of its long-term valuation range.
"I think it’s probably not come down enough," Santo commented, adding that even with the anticipated lower interest rates, further declines in valuations are possible.
The Federal Reserve’s recent shift towards a more dovish stance has fueled expectations of rate cuts. With the market anticipating a potential 50 basis point cut in September, experts believe this could accelerate the stabilization process.
"The market recognizes usually that once an easing campaign begins, it’s the beginning of a series," explained Mike Santo, noting the significant difference between the current Fed Funds rate and the 2-year yield. This gap highlights the market’s expectation of further easing measures.
Even though historical patterns may not perfectly predict market behavior in the current environment, the consensus surrounding a September rate cut could significantly alleviate pressure on the markets.
As rate-sensitive sectors like utilities, home builders, and REITs show signs of outperforming, the market seems to be responding to the shift in expectations. With the correction continuing, even if at a slower pace, the coming weeks will be crucial in determining the direction of the global markets.
Market Correction: A Healthy Setback or Further Volatility Ahead?
The recent market correction, fueled by concerns about a potential slowdown in the US economy and the unwinding of the "carry trade," has sent shockwaves through global financial markets. Investors are grappling with the rapid shift in sentiment, leaving many wondering if we are witnessing a healthy adjustment or a prelude to further volatility. While the market has shown signs of stabilization, experts warn that the correction may not be over, particularly as the US Federal Reserve grapples with its policy response to a rapidly evolving economic landscape.
Key Takeaways:
- The correction came after a strong first half: The recent market correction followed an extended period of robust growth, particularly in the US equity market. Global equities had risen significantly, and the NASDAQ had gained by nearly half.
- Complacency and optimism fueled the rise: The market was buoyed by investor optimism about the potential of artificial intelligence and a seemingly healthy economic outlook. However, this generated a level of complacency, leaving the market vulnerable to even slight shifts in sentiment.
- The US economy is showing signs of slowing: While the US economy has been relatively resilient, there are growing concerns about its future trajectory. Evidence of slowing economic growth in Europe and China, coupled with rising inflation and tighter monetary policy, has weighed on market sentiment.
- The Fed’s response will be crucial: The Federal Reserve’s stance on interest rate policy is a critical factor in determining the course of the market correction. The market is now pricing in multiple rate cuts before the end of the year, signaling a potential shift from a tightening to an easing cycle.
- Valuation pressures remain: While valuations have moderated somewhat, they remain elevated, particularly in the technology sector. The market may experience further correction as investors seek more attractive entry points.
A Correction After a Long Bull Run
“The setup of this correction is important for context,” says Mike Santo, a market analyst. “Bear in mind it came after one of the strongest first halves at least for the US Equity Market that we’ve seen over many decades, and really since the trough of the markets that we saw last October.” Global equities had already risen significantly, with the NASDAQ experiencing a gain of approximately 50%, reflecting the optimism surrounding the potential of artificial intelligence. This extended period of growth, fueled by a sense of complacency, created a backdrop ripe for a market adjustment.
“We’d seen this tremendous rise and a lot of complacency really built into the markets, really as a function of optimism about AI,” Santo adds. “So, I think in the sense this correction was healthy and somewhat inevitable after such a long period without a b b particularly as you started to get some signs that the US economy was slowing.”
Easing Concerns and the Fate of Interest Rates
While the market has demonstrated some resilience in recent weeks, the prospect of further volatility remains a concern.
“My feeling is that this correction although is stabilizing is not yet over,” Santo states. “We’re still going to see I think some choppy uh environments in the short term as as as investors really start to calibrate and get more confident again about the direction of interest rates in the economy.”
The Federal Reserve’s stance on interest rates is a key driver of market sentiment. The market is now pricing in multiple rate cuts before the end of the year, signaling an anticipated shift from a tightening cycle to an easing cycle.
“We’ve seen in the last 24 hours quite a bit of fed Soo saying you have a market that is rapidly moved to price in much more in terms of rate Cuts before the end of this year,” Santo notes. “And even Steve leisan this morning sharing from his own reporting that perhaps 50 basis points is now on the table in September. It wouldn’t necessarily take a recession or even a growth scare to get there. It’s just the fact that fed’s forecasts are are now playing catchup to to what we’re seeing in the data.”
The consensus is now moving towards a rate cut in September, raising the question of whether the Fed’s easing campaign will have the intended effect of stimulating the economy and boosting market sentiment.
“I do think solidifying around perhaps a September cut not an emergency cut before that and 50 basis points does make sense because the market recognizes usually that once an easing campaign begins it’s the beginning of a series,” Santo explains. “And if you look at the gap between the FED funds right now at 5 and 3/8 and where the two-year yield is trading, it’s massive, and so that’s the Market’s way of saying fed’s a little bit late has more to do I think that’s fine. I don’t know that we can go to the historical playbooks and say hey here’s how the market behaves and the First Rate cut because it really hasn’t conformed to those patterns up to this point, uh in terms of how we traded into the First Fed rate hike during the tightening campaign bottoming when we were still tightening. But I do think it would take the pressure off if the consensus kind of coalesces around uh that idea.”
Valuations and the Path Forward
Despite the market’s recent stabilization, concerns about valuations linger.
“I think it’s probably not come down enough,” Santo says regarding the NASDAQ’s current multiple of approximately 24 times. “I mean the usfd market broadly has moderated in valuation a little bit but it’s still right at the top of its long-term range and that’s to uh whether you exclude the largest tech stocks as well. Now admittedly lower interest rates if they come through and the markets are expecting that now will help to stabilize the markets and valuations, but I think we could see a bigger ShakeOut in valuations yet before you really start to get you know value investors um uh seeking it out as a good correction opportunity.”
The path forward for the market remains uncertain, driven by a confluence of factors, including the Fed’s policy stance, economic growth prospects, and evolving investor sentiment. While the recent market correction may have been a healthy adjustment, the possibility of further volatility persists.
“A little bit of everything here,” Santo concludes. “You know Mike mentioned earlier the multiple on the NASDAQ for example has come down. It’s around 24 times. Is that enough to encourage some who might otherwise not have taken a chance to say ‘okay, fundamentally at least this seems like a decent entry point?’ Well, I think it’s probably not come down enough. I mean the US market broadly has moderated in valuation a little bit but it’s still right at the top of its long-term range, and that’s to, whether you exclude the largest tech stocks as well. Now, admittedly lower interest rates, if they come through and the markets are expecting that now, will help to stabilize the markets and valuations. But I think we could see a bigger ShakeOut in valuations yet before you really start to get, you know, value investors, um, uh seeking it out as a good correction opportunity."
As investors navigate this period of uncertainty, a careful analysis of economic data, market sentiment, and policy signals will be crucial in determining the future trajectory of the market.
