Global markets have recently experienced a series of stumbles due to concerns about China's economy and higher sovereign bond yields. Last week the S&
P 500 dropped 2.1 %, worryingly, with every sector ending in the red. Banks faced a significant decline of 5%, while consumer stocks only did slightly better. Earnings reports were mixed; Walmart raised its outlook but hinted at the potential strain on discretionary spending, whereas Target revised its guidance downwards.
In recent months, stocks have bounced back as investors continued to buy the dip despite initial pessimism at the start of 2023 due to concerns about a possible recession. The economy has shown resilience, which has led to an improvement in sentiment. Manysuggest a bullish sentiment, with the Investors' Intelligence Survey showing bullish sentiment at over 55% compared to bearish sentiment at under 20%. This is a significant change from late 2022, when the opposite was true.
These are indeed unusual times within this stage of the cycle. Usually, when the market sniffs out a peak in official rates, longer-term rates tend to decrease gradually in anticipation of forthcoming cuts in those rates. However, the current situation appears to differ, with the most noteworthy shift, however, has been the diminishing expectation of numerous rate cuts. This evolving outlook, which foresees fewer future rate cuts, has contributed to the ongoing trend of higher longer-term rates.
Furthermore, mounting unease surrounds the adequacy of China's efforts to support its economy. However, it's important to note that Beijing is unlikely to employ a sweeping fiscal stimulus akin to the Bazookas utilized during the Global Financial Crisis. I suspect policymakers believe there is no one-size-fits-all solution for reigniting economic growth as in yesteryear.
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