Expert Analysis Reveals Astonishing Insights on the Current Stock Market Rally

Is the market rally of this year coming to a close?

It is premature to make a definitive statement, however, there are concerning signals suggesting that investors are feeling anxious.

After a challenging year in 2022, stocks have made a recovery in the current year. The surge in technology-driven advancements, particularly in artificial intelligence, has fueled excitement among investors. Additionally, the apparent reduction in inflation has raised optimism on Wall Street, with hopes that the Federal Reserve would soon limit its interest rate hikes. This has contributed to a marginal increase in equity prices.

Now, markets don't appear as attractive. The ability of the economy to withstand multiple interest rate increases, along with a slight increase in inflation data this month, and the indication from the Federal Reserve that rates may be raised once more this year and kept at higher levels for a longer duration than expected, has begun to erode the gains in the markets.

While the benchmark S&P 500 index has not entered into correction territory, which is defined in this case as a 10% decrease from its most recent peak on July 31, this means that stocks still have potential to decline further, according to Liz Young, the head of investment strategy at SoFi.

"Theres more risk to the downside, at least in the near term," said Young.

Here are some signs that suggest there could be more pain to come.

The market breadth is narrowing as the surge led by tech giants earlier this year began to broaden out in the early summer. However, it has since narrowed over the past few months. This week, the percentage of stocks in the S&P 500 index trading above their 200-day moving averages, which is a commonly watched indicator of market breadth, reached its lowest level since March.

A limited rally does not augur well for the overall stability of the markets, as it indicates that only a small portion of stocks is providing support, making it more vulnerable to a decline. Throughout this year, the dominant players in the tech industry have been primarily responsible for driving the market's growth. Nevertheless, even these tech giants have experienced a downturn in recent weeks. Specifically, Nvidia shares have plummeted by approximately 13% this month, Apple has shed 9%, and both Tesla and Microsoft have suffered a 4% loss.

Wall Street's sentiment is deteriorating. Despite a brief uptick earlier this month, CNN's Fear & Greed Index, which evaluates seven different technical indicators to determine market sentiment, has been trending downwards since its peak in late June. On Wednesday, the index reached an "Extreme Fear" level for the first time since March, when concerns of a recession arose due to the collapse of regional lenders Silicon Valley Bank and Signature Bank.

In recent weeks, there has been a surge in treasury yields. Investors are evaluating the state of the economy along with signals from the Federal Reserve indicating a prolonged period of higher rates. Although yields retreated slightly on Thursday, they remain close to their highest point in a decade. The yield on the 10-year US Treasury note currently stands at 4.597%, a slight decrease from the previous day's 4.626% but still marking the highest closing since October 2007.

Stocks are negatively affected by high yields because investors tend to prefer nearly risk-free Treasury bonds when they offer greater returns than stocks.

The rising trend of oil prices is being observed. This summer, oil prices have experienced a surge due to output reductions implemented by OPEC+. On Wednesday, US crude prices reached their highest point since the previous year when concerns arose regarding a potential supply constraint following Russia's invasion of Ukraine, leading to a significant increase in oil prices. Although prices slightly declined on Thursday, they still remain high and are close to reaching $100 per barrel.

According to conventional wisdom on Wall Street, when oil prices rise, it leads to increased input costs for businesses and compels consumers to spend more on gasoline and heating, ultimately impacting both company profits and consumer spending. This, in turn, poses a potential negative effect on stocks.

Additionally, investors express concerns that elevated crude prices will result in higher inflation, prompting the Federal Reserve to further increase interest rates in order to achieve its 2% inflation target. However, economists at Goldman Sachs dismiss these worries.

"The Fed is not expected to adjust its policy in light of rising oil prices, particularly considering the simultaneous decrease in core inflation and inflation expectations," they wrote in a note on Sunday.

Girl Scout cookies are coming back, and prices are going up

Girl Scout cookies are becoming pricier according to my colleague Danielle Wiener-Bronner. The Girl Scouts Heart of the Hudson, a chapter in New York State, recently informed troop parents and community members via email that the price for all cookie varieties will increase to $6 per box during the upcoming cookie season. This season typically runs from January to April nationwide and marks a $1 increase compared to last year's prices.

GSHH plans to address the surge in production and material expenses by raising the price of all cookie packages to $6, according to the interim CEO. Additionally, it is anticipated that neighboring councils will follow suit and announce comparable price increases in the upcoming weeks and months. While certain cookies such as Smores and Toffee-Tastic were already priced at $6, this adjustment will now encompass the broader range of cookies offered by the troops, including the more traditional options.

Read more here.

US consumer spending was much weaker in the second quarter than previously estimated

The Commerce Department's latest update on second-quarter gross domestic product (GDP) revealed that economic growth remained steady at an annualized rate of 2.1%, unchanged from the previous estimate. However, consumer spending, which plays a vital role in driving the American economy, was revised significantly lower. According to recent data released on Thursday, it registered a 0.8% annualized rate, down from the 1.7% rate previously estimated. This indicates that spending during the second quarter experienced its slowest growth since the first quarter of 2022 when it remained stagnant.

My colleague Bryan Mena reports that the substantial revision on Thursdays reveals that Americans significantly reduced their spending during the early part of the year, surpassing previous estimates. It is noteworthy that consumer spending contributes to approximately 70% of the overall economic output. This decline in spending was predominantly observed in services and nondurable goods, including items like clothing, cleaning supplies, and beauty products, which are intended for short-term use.

Read more here.