Investor Sentiment Deteriorates Following U.S. Government Shutdown
Although the U.S. government shutdown has concluded, the subsequent ramifications are becoming apparent for investors, who remain apprehensive about the potential delays or setbacks in Federal Reserve rate cuts.
This concern is compounded by misgivings regarding inflated AI stock valuations, which have intensified pressure on corporate equities and bonds. As a consequence, Thursday witnessed the most significant selling spree for the rate-sensitive Nasdaq index in a month.
Despite its earlier ascent, buoyed by a surge in AI-related stocks, the index has since declined approximately 4% from its peak in October.
Early trading on Friday mirrored this volatility, with major stock exchanges—from Tokyo to Paris and London—struggling in negative territory. However, by day’s end, the situation had somewhat stabilized.
In an unexpected turn of events, both gold and bitcoin faced declines, with the latter dipping below $96,000 for the first time since May. Additionally, credit spreads—representing the premium companies must pay over U.S.
Treasuries to issue bonds—widened significantly during the week. Michael McGowan, managing director of investment strategy at Pathstone, noted, “The market certainly has some froth both in terms of valuations and expectations.”
He added, “A healthy skepticism appears to be creeping into the market, and this sentiment may persist.”
The quandary is further complicated by an information void, impacting everything from futures positioning to crop forecasts. Particularly, crucial statistics on employment and prices, which were not gathered during the 43-day shutdown, are absent.
There are uncertainties surrounding the release of October’s inflation data, and the employment report for that month will lack the jobless rate, as the relevant household survey was not conducted.
In a recent announcement, the Census Bureau and the Bureau of Labor Statistics confirmed they would begin to release the data that was omitted during the shutdown next week, with employment data for September scheduled for publication on November 20.
‘Navigating Through Uncertainty’
The significance of these data gaps cannot be overstated, particularly as Federal Reserve Chair Jerome Powell has likened the situation to “driving in the fog.” He has indicated a tendency for policymakers to “slow down,” suggesting a hesitation to reduce interest rates further after two cuts in September and October.
Tim Horan, chief investment officer for fixed income at Chilton Trust, articulated, “While the Fed may have felt confident regarding their course of action in September and October, can they maintain that certainty with such scant data ahead of the December meeting?”
Expectations for a 25-basis-point rate reduction in December, previously deemed a certainty, have dwindled to about 46%, according to CME’s FedWatch tool.
“The market has undeniably experienced an extraordinary rally since the April low, which has largely gone uninterrupted,” stated Matt Sherwood, head of investment strategy at Perpetual in Sydney.
“Continuing this trend will require Fed rate cuts and sustained favorable financial conditions to validate what many perceive as extreme valuations.”
As of last Wednesday, the forward price-to-earnings ratio for the S&P 500 was 22.8 times—substantially above its 10-year average of 18.8, per LSEG Datastream.
Coupled with year-to-date gains exceeding 20% in dynamic sectors such as technology, it is not surprising that investors are keen to realize profits.
The atmosphere has turned decidedly volatile, with notable equities such as Palantir and Oracle suffering declines of approximately 12% and 14%, respectively, just this month. Moreover, chip manufacturing giant Nvidia has experienced a 6% dip.
Nvidia’s upcoming results are pivotal, as the stock has been a linchpin in the record-breaking rally throughout this year. Chuck Carlson, CEO of Horizon Investment Services, remarked, “We’re entering a period where any downturn could resonate further across sectors that have posted significant gains, incentivizing investors to safeguard profits.”
Adding to investor unease, Michael Burry’s decision to shutter his hedge fund, Scion Asset Management, has raised additional alarms regarding lofty AI valuations.
Burry contends that technology titans investing billions in Nvidia chips and servers are effectively elongating depreciation cycles to present a more favorable earnings landscape.
oncerns around valuation have seeped into corporate debt markets as well, with bonds issued by Oracle Corp witnessing a downturn amid apprehensions about the tech giant’s significant debt expansion aimed at bolstering its AI framework.
Market Volatility Expected to Persist
Throughout the government shutdown, the data vacuum allowed previously underappreciated private surveys to gain traction, presenting a mixed overview of the economy. While consumer spending appears resilient, certain metrics indicate a frightening increase in layoffs.
Investors are grappling with uncertainties, clinging to predictions of at least three rate cuts by the end of 2026, targeting rates around 3%.
However, analysts caution that such views may soon undergo scrutiny, as a growing contingent of policymakers expresses reticence towards further rate reductions.
Bob Savage, head of markets macro strategy at BNY in New York, succinctly encapsulated the current situation: “The Fed is effectively flying blind, much like the rest of us.”
Source link: M.economictimes.com.
