A week ahead on Wall Street: Fed-aligned investors see growing risk from rising US stocks

The Federal Reserve’s hawkish stance, rising Treasury yields, and the looming government shutdown add up to a cocktail of risks that has spooked investors and clouded the outlook for U.S. stocks.

United States have fallen more than 6% since peaks in late July, and the last week has been particularly stressful for investors. The Fed expects to keep interest rates high for longer than expected, leading to a sell-off in U.S. stocks and bonds.

The S&P 500 index fell by 2. this week, a 9% decline, the largest weekly decline since March. BOFA Global survey data showed investors sold global stocks at the fastest pace this year, with a net $16.9 billion worth of stocks leaving trading in the week leading up to Wednesday. The index has grown by 12.8% since the beginning of the year.

“We have recorded stable growth in the summer months, but we are entering a period of significant risk to the economy”; said Charlie Ripley, senior investment strategist at Allianz Investment Management. Citing the desire to minimize risk, investors anticipate a slight decrease in their enthusiasm for stocks, according to his analysis.

10-year U.S. Treasury yields, which move inversely to prices, are near their highest level in 16 years. High yields on government bonds overshadow the appeal of stocks and offer investors an attractive return on an investment that is considered virtually risk-free.

Furthermore, market players are contending with numerous conceivable challenges to the growth of the U.S. economy, which has been a key driver behind this year’s surge in stock prices. The biggest challenge is raising interest rates if the Fed continues to focus on keeping borrowing costs high in a determined effort to reverse inflation.

The Fed relies too much on the soft landing narrative”; said Brian Jacobsen, chief economist at Annex Wealth Management.“A confident Fed is a dangerous Fed because it ignores the early signs of weakness.”

Other risks include high oil prices, the resumption of student loan payments in October, and the planned government shutdown if lawmakers fail to budget by September 30.

Seasonal factors also appear bleak, at least in the short term. In September, the S&P 500 Index hit its historically weakest 10-day period of the year. According to BofA Global Research, 18. Historically, the index has fallen 1.66%, in a period where the first 10 days of the month underperformed, similar to this year, the bank said.

“Seasonality manifests itself with unpleasant days until October”; However, BoFA analysts wrote that dips could create opportunities for dip buyers.

At the same time, the ongoing government shutdown could increase concerns about the situation in the United States. The government is blocking the impasse and further increasing the yield on government bonds. Earlier this year, lawmakers fought a long battle over raising the debt ceiling. This led to a downgrade of the credit rating by the rating agency Fitch, wrote analysts at Societe Generale.

Higher yields could make matters worse for stock markets, which have struggled with rising yields in recent weeks.

Of course, the strategists and indicators showed there was plenty of liquidity left for investors looking to buy on weakness. Buyers would likely step in if the S&P 500 fell to 4,200, about 3% from its current level, said Keith Lerner, co-chief investment officer at Truist.

Such a decline would bring the price-to-earnings ratio to 17.5, which is in line with the 10-year average, Friday’s report said.

“At least initially, we expect buyers to flock to this area….to help mitigate short-term weaknesses,” he said.

Adam Turnquist, chief technical strategist at LPL Financial, remained bullish in the report released Friday evening, even as most indicators, including market breadth, were positive. He noted that the S&P 500 index was above its 200-day moving average and there was no sign of investors fleeing for safety.

From a broader perspective, the market exhibits a downturn, yet he emphasized it’s not a straightforward decline in his written analysis. It’s entirely customary to experience a retracement during a bullish market phase.

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