Concerns about US economy reflected in declining small stocks on Wall Street
Small stocks sink, signaling Wall Street's ongoing anxiety about the US economy in a fading market rally The Fed maintains steady interest rates for the second time, while Turkey prices decline amid Thanksgiving preparations
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Following its second consecutive pause at the recent meeting on Wednesday, investors appear confident that the Federal Reserve has halted its rate hikes.
However, concerns about the state of the US economy continue to persist on Wall Street, as evidenced by the decline in small-cap stocks. The Russell 2000 index, which monitors the progress of small-cap stocks in the US, recently reached its lowest point since November 2020, having already experienced a negative turn in October. Compared to the S&P 500 index's 10% increase, the Russell 2000 index has fallen by 5% this year, indicating its underperformance.
Small-cap stocks experienced a surge in the spring, expanding the market rally beyond Big Tech giants and instilling optimism among investors about the durability of the growing bull market. Many of these small-cap stocks belong to the financial sector, and their resurgence is seen as crucial for sustaining the rally. As per popular belief, the strength of banks contributes to a strong economy and stock market.
However, the stock rally lost its momentum in the middle of summer and has struggled to regain stability since then. The Israel-Hamas conflict prompted investors to seek safe havens like gold, and the rise in bond yields has made holding cash the most appealing option in years.
The decline is a reflection of pessimism regarding the health of the economy. Investors are facing challenges from elevated interest rates and geopolitical conflicts, according to Jim Polk, head of equity investments at Homestead Funds.
Despite the Fed's aggressive efforts to combat inflation, the labor market and the broader economy have shown impressive resilience. However, there are concerns among economists and investors that the full impact of the central bank's tightening of monetary policy has yet to be felt. This has resulted in the benchmark lending rate reaching its highest level in over 22 years.
The Russell index may struggle to rally or assume a leading position in such an environment, according to Mona Mahajan, senior investment strategist at Edward Jones.
The Fed on Wednesday maintained the possibility of future rate hikes, pointing to ongoing inflation that has yet to reach the central bank's 2% objective. Fed Chair Jerome Powell furthermore asserted that the idea of reducing rates has not crossed the minds of Fed officials.
Nevertheless, Mahajan opines that small-cap stocks might experience a surge, particularly if the economy regains momentum in the upcoming year.
According to data from Penn Capital Management, historical evidence suggests that small-cap stocks tend to perform well after major market declines. In fact, the iShares Russell 2000 exchange-traded fund has outperformed the S&P 500 in the two years following four out of six bear markets between 2007 and 2020. With this in mind, Polk, who manages a small-cap fund, sees potential in undervalued energy and financial stocks. His firm has investments in both sectors.
Still, small-caps are "certainly not a buy, buy, buy," said Polk.
The Fed holds interest rates steady for second time
The Federal Reserve kept interest rates unchanged on Wednesday for the second consecutive meeting, maintaining the central bank's benchmark lending rate at its highest level in 22 years, according to Bryan Mena, my colleague.
Anticipating a continued impact of increased borrowing costs on the US economy, economists and financial markets had predicted a halt in the Federal Reserve's aggressive rate-hiking strategy, following indications from several Fed officials.
The Federal Reserve acknowledged in its post-meeting statement that the economy experienced significant growth in the third quarter, a recent occurrence that has left some economists perplexed.
Although the Federal Reserve has taken decisive action by increasing interest rates 11 times since March 2022 to address inflation, the United States economy has not only managed to avoid a recession up until now but has also recorded an impressive annualized growth rate of 4.9% in the third quarter. This growth can largely be attributed to strong consumer spending.
Read more here.
Turkey prices drop as Thanksgiving planning ramps up
Turkey prices have experienced a significant decline, making the expense of preparing a Thanksgiving meal more affordable for families on a limited budget, according to Parija Kavilanz, my colleague. Michael Swanson, the chief agriculture economist at Wells Fargo Agri-Food Institute, confirmed the substantial drop in retail turkey prices.
"Given the significant decrease in turkey prices, and considering it is the main focus of the Thanksgiving feast, celebrating the holiday at home will be more beneficial for families this year," stated Swanson. Swanson also mentioned that store prices for the popular 10 to 15-pound turkeys have seen a 13% decline in October compared to the same period last year.
According to Wells Fargo's new Thanksgiving food report released on Wednesday, the decline in shelf prices for the bird also aligns with a striking 29% drop in the wholesale price for turkey this October compared to the previous year.
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