Interest Rates Drive Everything | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Stock Market Slides

I warned several weeks ago that August and September can be tricky months for the stock market, and so far, August has lived up to its reputation with the S&P 500 index down roughly 3.5% since the beginning of this month.

It’s no coincidence that the markets have run into headwinds at the same time bullish sentiment has reached its highest levels of the year.

When everyone is bearish (like they were at the beginning of the year) the market is more likely to surprise to the upside (like it did during the first half of the year). However, when optimism reaches a fever pitch, stocks can become vulnerable to bouts of volatility.

This optimism turned into a mania in mid-July as investors jumped on the A.I. bandwagon thinking that stock prices were destined to climb ever higher.

There are fundamental reasons to expect some further turbulence in the stock market as well. Earnings estimates have been drifting lower all year.

The silver lining could be that the rate of those estimate reductions has slowed, so the rate of change trend is moving in the right direction. IF (and it’s a big if) there is no further deterioration in corporate profit expectations for the next few quarters, it is likely that any equity market volatility could be relatively short-lived.

Featured Insight: Interest Rates Drive Everything

Most people pay very little attention to interest rates unless they are taking out a loan or buying a CD – let’s face it, interest rates are pretty boring.

Nevertheless, interest rates are the center of gravity of the financial and economic universe, so ignore them at your own risk.

Interest rates are at the heart of how all financial assets are valued, and drive decision making for business investment.

Rising interest rates have clearly been a key source of financial market volatility during the past 18 months, and the accumulated debt and future borrowing needs of the federal government could continue to put upward pressure on longer-term interest rates.

Looking Ahead: Data Vacuum

With second quarter earnings reporting season nearly over and very little economic data to be released in the next week, we’re in for a bit of a data vacuum.

After a modest pullback in stocks during the past few weeks, this could come as a welcome reprieve, as many times, no news is good news.

On the other hand, markets could begin taking their cues from the volatile news headlines that they have mostly ignored so far this year.

Russia/Ukraine, China/Taiwan, and I won’t even go there regarding the perpetual circus in Washington, but there are obviously plenty of things to hold investors’ attention.

In the meantime, we’ll be managing risk and seeking out opportunities to take advantage of any further volatility.

Copyright 2024 The Business Journal, Youngstown, Ohio.