Bond Yields Drop After Economic Data, Chart.
The recent debate between President Joe Biden and former President Donald Trump has caused significant fluctuations across various financial sectors. Traders are re-evaluating their positions as the political landscape shifts. Biden's performance has led to increased optimism regarding Trump's chances of securing a second term, causing a rise in stocks of private prisons, credit card companies, and health insurance firms. Conversely, renewable energy and cannabis stocks are experiencing declines.
Market Reactions to Political Developments
JPMorgan Chase & Co. strategist Marko Kolanovic predicts the S&P 500 will face significant declines due to economic headwinds and downward earnings revisions. He forecasts a drop to 4,200 by year-end, representing a roughly 23% decline from recent levels. Kolanovic highlighted a disconnect between the surge in U.S. equity valuations and the business cycle, noting the S&P 500's 15% year-to-date gain is unsupported by growth projections.
Earlier on Friday, the S&P 500 showed early gains but later fell. Treasury yields rose, reversing initial declines following inflation data that had strengthened expectations for Federal Reserve rate cuts. Market participants closely monitored developments in the U.S. presidential race while exercising caution ahead of the French elections.
Strategic Insights from Financial Analysts
Adam Turnquist of LPL Financial commented on historical trends, suggesting that a strong first half often leads to above-average returns in the second half. He noted that, despite overbought conditions and elevated valuations, seasonal trends could support continued momentum. According to Turnquist, the S&P 500 typically gains an average of 6% in the second half following a positive first half, with even higher gains when first-half returns exceed 10%.
Goldman Sachs Group Inc.'s Scott Rubner anticipates significant market swings post-election. Having accurately predicted bullish trends in May and June, Rubner now models a market correction following July 17, potentially leading to a 10% decline in equities. He advises trimming exposure post-July 4th.
Economic Indicators and Federal Reserve Policies
Economic data continues to influence market sentiment. U.S. consumer sentiment declined less than expected, with moderated inflationary pressures and a rebound in household spending. These indicators suggest price pressures may be easing without severely impacting consumers.
David Donabedian at CIBC Private Wealth US remarked on the near-perfect nature of recent inflation data, highlighting its alignment with the Federal Reserve's targets and the resilience of consumer spending. Meanwhile, Mohamed El-Erian noted the risks of a policy error by the Fed as the economy slows faster than anticipated. Seema Shah of Principal Asset Management indicated that further deceleration in inflation, alongside labor market softening, is necessary to justify rate cuts in September.
Federal Reserve Bank of San Francisco President Mary Daly acknowledged that monetary policy is having the desired effect, though the timing for reducing borrowing costs remains uncertain. Her Richmond counterpart, Thomas Barkin, emphasized that the battle against inflation is ongoing, underscoring the need for continued economic resilience. Jeffrey Roach of LPL Financial suggested that as long as incomes grow, consumer spending will remain robust, making the labor market a key focus for upcoming nonfarm payroll data.
Joe Kalish of Ned Davis Research emphasized the importance of the Fed's policy timeline for the bond market, noting that bond yields tend to peak before the first rate cut.
Corporate Highlights
Several corporations have made notable moves in the market:
- Uber Technologies Inc. and Lyft Inc. have agreed to worker benefits, resolving a lawsuit in Massachusetts challenging drivers' employment status as independent contractors.
- Rite Aid Corp. received court approval for a restructuring plan, allowing it to exit bankruptcy and avoid liquidation.
- Microsoft Corp.'s $13 billion investment in OpenAI Inc. is under scrutiny by EU antitrust watchdogs.
- Nokia Oyj agreed to acquire Infinera Corp. in a $2.3 billion deal to expand its networking products for data centers.
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