Wall Street is getting more and more worried about the U.S. economy. The stress is also being felt by American families. If this week’s economic and earnings reports show that this is true, it could stop the stock market from recovering from its worst day in two years.
On Friday, U.S. stocks ended a rough week in which the unwinding of a carry trade driven by the Japanese yen and fears of a weakening U.S. economy shook the world’s financial markets. At the end of the week, all major benchmarks were just short of reversing all of their weekly losses.
FactSet data shows that the S&P 500 SPX 0.47% fell by less than 0.1% over the course of the week. The Nasdaq Composite COMP 0.51% fell by 0.2%, and the Dow Jones Industrial Average DJIA 0.13% fell by 0.6%.
Now, investors are looking forward to a new set of U.S. economic indicators coming out later this week. These include the consumer price index (CPI) report for July, as well as updates on retail sales and earnings from some of the country’s biggest retailers. They want to know if rising prices and higher interest rates are making things harder for American families.
Concerns about hard-landing risks caused a brief Wile E. Coyote moment, but a team of experts at BofA Global Research led by Michael Gapen said that the markets had temporarily stabilized. “From here on out, the numbers will have to tell us whether the economy is slowing down slowly or quickly.”
As with all important economic data, the July CPI numbers could have a big effect on the markets and the Federal Reserve. However, investors will pay more attention this time because they are worried that any signs of an economic slowdown and inflation not falling fast enough could send stocks into a tailspin.
The Wall Street Journal asked economists and found that headline inflation will stay the same at 3% year over year in July. However, core CPI, a more closely watched measure that takes out volatile costs like food and energy, is expected to slow from 3.3% in June to 3.2%.
It is “rare” for the CPI to stay stable below 2%, according to Brian Weinstein, head of global markets at Morgan Stanley Investment Management. This means that inflation will stay higher than the Fed’s goal for a while.
Weinstein called BourseWatch on Thursday and said, “There seems to be inflation in some painful areas, such as car insurance and home insurance. That takes money out of consumers’ pockets every month.” This was especially true in places where population growth was big.
As well, he said that the unknowns of geopolitical conflicts and the economic plans of the U.S. presidential candidates in 2024 are “enough to keep inflation from going back below 2% in a meaningful way.”
Companies can feel it because customers’ wallets are getting smaller.
The first half of the year went well with the Fed’s plan to keep the economy going while lowering prices. But in the last few months, companies that deal with consumers have started to point out early signs of a slowdown in spending.
Last month, the luxury goods company LVMH MC 0.43% said that sales in its Asia-excluding-Japan business, which made up 30% of its income in the first half of 2024 and was dominated by China, fell in the second quarter. McDonald’s Corp. MCD -1.21% said last week that inflationary pressures have made their customers, especially low-income households, more selective about how they spend their money. On the other hand, vacation rental site Airbnb Inc. ABNB 0.38% predicted a slowdown in leisure travel as people wait to book overnight stays because the economic outlook is still uncertain.
Americans who ran out of savings from the COVID-19 pandemic have been hurt by years of chronic inflation and the Fed’s cycle of tightening money. A lot of people need to be pickier about the things they buy and the places they treat themselves.
“It’s clear that it’s a very tough consumer environment,” said Brad Conger, chief investment officer at Hirtle Callaghan & Co. “Most of the companies that deal directly with customers, like Starbucks SBUX-0.87% and McDonald’s, have issued profit warnings.” “That shows how invested people are in their jobs and their future income, as well as how much savings people have saved up.”
So, the earnings reports that some of the biggest stores in the U.S. are going to release this week are another big event in the U.S. stock market.
Walmart Inc. WMT 0.43% and Home Depot Inc. HD 0.09% are two companies that are going to report earnings on Tuesday and Thursday, respectively. Investors are waiting for more information about the state of consumers from businesses that sell everyday household goods.
Conger said that the drop in spending by consumers could affect other parts of the consumer industry as well. “People are cutting back on all kinds of spending, which means that businesses will hire fewer people when they plan to,” he said. “This leads to more jobs and additional income.”
As for growth so far this year, economic data has been all over the place. There were more signs last week that the U.S. economy might be getting closer to a recession, but the service sector of the economy bounced back in July. The number of Americans applying for jobless benefits dropped from a one-year high to 233,000 last week. This suggests that the job market may still be in good shape, even though the July jobs report was not very good.
Both of last week’s reports helped stocks make up some of the weekly losses they suffered after falling on Monday.
“There’s some fear and weakness in the stock market…” But small positive surprises in economic data won’t cause a big shift in market mood. This means that if more data points come in positive over the next few weeks, each one will have less of an effect on the market, Conger told MarketWatch. “The markets are risky right now, so they react too much.”
He said that the market will be more volatile in the future, which will likely “cap” the rise in stock prices. “But I don’t think that means we’ll have a hard landing.” “It doesn’t mean there will be a recession,” he said.
