US Economic Data Raises Concerns Amid Bullish Market Sentiment
In the wake of tariff uncertainties and tightening Federal Reserve policy, the robust US economy has been a refuge for investors, encouraging them to allocate funds to the markets. However, Friday's trading session hinted at limitations to this protection.
Despite initial expectations of sustained low volatility, negative reports on consumer sentiment, housing, and services sent the S&P 500 to its sharpest decline of the year. Bonds rallied as investors sought haven assets, despite concerns about renewed inflation.
Single-session drops have historically presented buying opportunities, but the discovery of a new coronavirus in bats by Chinese researchers heightened anxiety. Moreover, record cash investments by apprehensive investors indicate a willingness to exit markets at signs of economic stress.
The S&P 500 lost its weekly gains and fell 1.7%, while 10-year Treasury yields dropped nearly 8 basis points to 4.43%. The VIX Index, known as the "fear gauge," rose to one of its highest levels this year but remained below 20.
Michael O'Rourke, chief market strategist at JonesTrading, suggests that prior bullish sentiment was predicated on expectations of President Trump's policies fostering disinflationary growth, which is now being challenged by economic data.
While consistent economic data has supported the "America First" investment narrative, it can also trigger sudden market shocks. Recent inflation data has not been favorable, dashing hopes for immediate Fed rate cuts. A report on Friday showed a drop in US consumer sentiment in late February, accompanied by an increase in long-term inflation expectations to their highest since 1995. Existing US home sales also declined last month for the first time since September.
Prior to the recent market downturn, a resilient economy with strong employment figures and a stable unemployment rate had encouraged risk-taking behavior. However, the recent data releases have cast doubt on this bullish outlook.
Institutional investors have cautiously positioned themselves for the year, and Marija Veitmane, senior multi-asset strategist at State Street Global Markets, believes that the bullish narrative can continue as the US economy remains resilient.
Even so, investors should note that increased market volatility can accompany policy uncertainty and elevated equity valuations. To mitigate risk, a well-diversified portfolio and continued investment in risk assets are recommended.
Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group, advises against abandoning risk assets while the job market remains healthy. However, some caution is warranted amidst the barrage of news and mounting uncertainties.
Bruno Braizinha, Bank of America's rates strategist, suggests hedging tail risks due to high levels of economic policy and trade uncertainty.