Most companies have reported their earnings for the past
quarter; overall, things look pretty solid. Despite a few big tech
disappointments, market sentiment has stayed upbeat—things keep climbing.
There’s strong optimism and ongoing demand for riskier
assets, and any dips in the market are quickly bought up. When fear does hit,
it’s more about shifting to other investments than panicking.
That said, the early August correction is a bit worrying.
Some significant players might be bailing out, possibly due to fears of
something serious. Whether this is a sign of things to come is still uncertain.
Meanwhile, analysts point to potential shifts in monetary
policy rather than economic problems as the main factors that could impact
market sentiment and trigger the long-anticipated crash.
So, how does this fit with the Fed’s plans to cut rates?
Typically, you’d expect that rate cuts would boost the
markets. However, it’s worth noting that the markets might have already priced
in not just one but possibly a few rate cuts from the Federal Reserve.
If things do not go as expected, markets could be affected,
but predicting the severity of the impact is difficult. In addition,
historically, U.S. stocks
tend to fall significantly when the Fed starts
cutting rates.
Regarding potential risks, investors are concerned that if
this week’s jobs report is stronger than expected, the Fed could cut rates at a
slower pace, causing the economy to continue to take a hit for longer.
In addition, a market correction in major indexes such as
the S&P 500, Nasdaq, and Dow Jones
looks overdue. The longer it is delayed, the worse it could get as
problems accumulate.
Looking at seasonal trends, such as the performance of U.S.
indices from Labor Day through the end of the year, may not be very helpful.
After all, past performance is no guarantee of future results.
The overall economic and geopolitical climate determines
the big picture. While the latter is certainly a concern, the economic
situation is far from calm, as corporate defaults and credit card debt are on
the rise.
What could support markets?
The U.S. elections
could offer some support. Historically, there is
usually an increase in market liquidity before elections, which can help lift
or stabilize stock prices.
The reason for this trend is simple: this year, U.S.
households and nonprofits have reached an all-time high in stock holdings, and
if they suffer losses, the vote could go to the wrong party.