Economic Concerns Threaten Stock Market Recovery

Chart of S&P 500 (SPX, SPY) - Economic Concerns Threaten Stock Market Recovery

Chart of S&P 500 (SPXSPY) – Economic Concerns Threaten Stock Market Recovery – Source: TheTechnicals.com and TradingView

Equity markets pulled back on Thursday after hitting yet a new year-to-date high just a day earlier. Investors were a bit spooked by significantly worse-than-expected economic data and reverberating economic concerns coming out of the Federal Reserve. Is this just a temporary blip within a strongly positive trend? Or is it a harbinger of an impending downturn?

It’s the Economy

If any one factor can halt the current market recovery in its tracks, it’s the state of economic growth. Fears over domestic and global economic weakening can quickly result in massive downswings in the stock market and a flight to assets that are perceived to be safer – like gold and Treasuries. Though stocks are still in the midst of a sharp rebound and recovery from the lows of late December, we’re starting to see more signs that economic concerns may be snowballing.

Fed on Hold

The Federal Reserve released meeting minutes from its January 30th FOMC meeting on Wednesday. The overarching theme was “patience” in raising interest rates further. Typically, any sign that the Fed may be slowing its rate hike trajectory or keeping interest rates low would be met with applause from investors. Companies and markets prefer low interest rate environments because higher interest rates have a negative impact on borrowing costs, business growth, and earnings. But if the Fed puts a hold on rate hikes due to concerns about the economy, which is now clearly the case, markets tend to get really nervous. Investors may be able to endure gradually rising interest rates. But a bad economy? Not so much.

The Fed’s increasingly dovish stance was reinforced on Thursday when St. Louis Fed President James Bullard told CNBC that interest rate hikes and balance sheet reduction are “coming to an end.” Bullard said that FOMC committee members had paid close attention to the “bad reaction in financial markets” as a result of December’s Fed rate hike. The hike was seen by investors as a Fed-driven step towards recession.

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Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock ...

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