After a huge midday reversal, the market of US equities futures went flat on Tuesday night. Futures of the S&P 500 and Nasdaq 100 slightly changed after the event, while the Dow Jones Industrial Average was just above the flat line. The yields of falling bonds provided boosts to the growth stocks. It happened before the release of new economic reports on Wednesday.
Meanwhile, in regular trading, the S&P 500 could finish the day with a 0.2% rise in the final hours of trading after experiencing a 2% loss. Nasdaq Composite performed better by having a 1.75% jump at the end of the day. The Dow that lost 129 points at the beginning of the week managed to cut down the loss too.
Potential economic recession
Investors worry about the potential recession after seeing an inverted curve between the benchmark 10-year US Treasury yield and the 2-year yield. The 2-year yield showed a 2.792% rate on Tuesday, while the longer yield duration was at 2.789%. This is commonly a sign that the economy will go into recession or that it has already fallen.
A drop in oil price is another sign of economic fall. The price went down by 10% on Tuesday when it reached below US$100 per barrel. Energy stocks also displayed a significant decline of 4%. Although it is a top-performing sector in the S&P 500 during the first half, it was the worst performance since 1970.
There is a fear among investors that the Fed will deal with this situation by raising interest rates so high that it eventually slows down the economy. At that stage, the recession will be inevitable.
Despite the grim situation, Wall Street analysts think that the recession will be moderate. Credit Suisse changed the year-end target for S&P 500 to consider the effect of higher capital costs on its stock valuations, but it believes that the US can avoid falling into a deep recession.
Ed Yardeni of Yardeni Research said that the market has been preparing itself for the recession. Instead of trying to prevent a recession, it adopts a new mindset: “Let’s just get it over with, we’re going have a recession, let’s do it”. The US market also begins “to look ahead into next year and that could very well be a recovery year from whatever this recessionary environment turns out to be”.
Cameron Dawson, chief investment officer at NewEdge Wealth, told CNBC that he doesn’t see “a debt crisis” in the upcoming recession, unlike the ones that happened in early 2000 and 2008. He explained that the US economy “could start to find some value around that 3,400-3,500 level” because that’s what it needs to return to the pre-Covid state.
Investors look forward to the latest mortgage purchase index from Mortgage Bankers Association which will be available on Wednesday at 7:00 a.m. ET. The manufacturing PMI data from Markit and Institute for Supply Management will be launched at 9:45 a.m. ET and 10:00 a.m. ET.
Investors can also check the Job Openings and Labor Turnover Survey (also known as JOLTS) at 10:00 a.m. ET. The Federal Reserve meeting will take place this Wednesday afternoon.