The Federal Reserve raised interest rates to the highest level since 2001, but the economy is growing, and bullish investors dominate the markets entirely.
Could it be that the Fed has finally learned from past mistakes and recessions are a thing of the past, opening the way to new all-time highs?
While it’s hard to believe, it’s not necessarily the case.
The rising cost of debt service may not yet be reducing consumer demand, it is certainly making life much harder for businesses, triggering a spike in corporate bankruptcies.
As for the markets, their current surge is due not so much to optimistic prospects as to the fear of missing the next big rally. Where it will come from, however, remains to be seen.
Maybe a UFO?
All kidding aside, there are many more objective reasons for the market correction.
First, there is no talk of a monetary policy review, and second, the markets look overinflated – the current 10-year P/E ratio for the S&P500 is 31.4 versus the recent market average of 20.
A strong labor market should also not be viewed as manna from heaven, as it could trigger new wage growth and then inflation, leading to another interest rate hike by the Fed.
As for quarterly reports, earnings for companies in the S&P 500 Index are estimated to have fallen 6.4% year-over-year for Q2. Not as bad as previously forecasted, but still.
This week, investors will be focused on Apple’s results. Many are expecting outstanding results, and they likely will be, despite looming litigation over App Store fees.
But even strong numbers do not guarantee a continued rally in the companies, as investors may take advantage of the moment to take profits.
Regarding long-term prospects, the adverse effects of high-interest rates on the economy will eventually manifest themselves. No wonder XAUUSD came close to the $2000 level.