Stocks drop again, but experts see light at the end of tunnel

MANHATTAN (CN) — Markets once again took a turn downwards as investors and economists grapple with an economy that is robust, earnings that are largely good and inflation that has yet to fully disappear.

By the closing bell on Friday, the Dow Jones Industrial Average lost 709 points, while the S&P 500 declined 107 points. The tech-heavy Nasdaq index fell sharply earlier in the week but was able to make up some of that ground to end the week down 340 points.  

While concerns about an impending recession abound some experts believe an inflection point is nearing, given equities’ poor performance lately, and economic data this week could point to the light at the end of the tunnel.

“Given how bearish the financial markets have become, and how nearly all the metrics associated with oversold conditions are pointing to an impending ‘relief’ or ‘oversold’ rally, markets appear poised for a bounce,” said Quincy Krosby, chief global strategist for LPL Financial. “Markets have a way of dismissing consensus estimates when you least expect it.”

The main drivers of buying and selling this week on Wall Street was a series of economic reports that show inflation remains sticky, though the economy also remains vibrant.

On Friday, the U.S. Bureau of Economic Analysis reported that the personal consumption expenditures price index increased by 0.4% last month, matching August’s print and coming in mostly as predicted. More alarmingly, however, the core index — which excludes food and energy prices — rose by 0.3% after a 0.1% increase from August.  

The main focus of the inflation report, as always, is how the Federal Reserve will react to it. Most experts believe the central bank will look past this latest report when it meets next week and once again “pause” its rate hikes.

The Personal Consumption Expenditures index is “a potential concern for Fed officials, but it won’t be enough to convince them to resume raising interest rates next week, particularly when there are still good reasons to expect both inflation and real economic growth to weaken over the coming months,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, wrote in an investor’s note.

Hunter noted the monthly price gains, like other inflation reports released this month, is due to the lagging increases in shelter costs and that the gains in other sectors are not overly concerning. “[W]ith labor market conditions continuing to cool and wage growth trending lower, there is little to suggest the latter will prove the start of a stronger trend,” he wrote.

The personal consumption report also showed that the savings rate declined to 3.4%, its lowest since the end of last year, and disposable income is starting to lag.

“As a result, consumer spending is likely to grow more slowly near-term, contributing to slower real [gross domestic product] growth in the fourth quarter of 2023 and first half of 2024 after blowout growth last quarter,” said Bill Adams, chief economist at Comerica Bank.

The gross domestic product estimate released on Thursday showed the U.S. economy grew by a whopping 4.9% in the third quarter, greater than expected and more than double the previous quarter’s economic growth. This is the fastest growth since late 2021, experts say, with strong spending from consumers, government, and businesses.

While the estimate is not the final word on economic growth during the third quarter, it is still points to a strong economy and increases the likelihood of a soft landing instead of a long or deep recession. Many experts say Wall Street may have a turn-around similar to the one it saw in late 2022 if the current economic trends persist.

“This alone isn’t going to cause the doom and gloom to recede,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. “But as long as unemployment stays low, consumers keep spending, and the economy keeps growing, then at least the worst impacts of higher interest rates can be spread out.”

Corporate America has remained mostly upbeat, and with good reason, following a raft of positive earnings reports. Coca-Cola’s earnings beat forecasts, with an 8% increase in net revenue, a lower operating margin from last year, and an improved full-year outlook.

Despite an ongoing labor strike, General Motors also exceeded expectations for the third quarter, posting a 5.4% increase year-over-year in revenue. However, the automaker showed a 7.3% drop in net income over the period, and it also pulled its earnings guidance for the year, citing disruptions from the strike.

Among Big Tech, earnings are also soaring. Amazon posted a 13% increase in revenue and a jump in net income to $9.9 billion in the third quarter, causing investors to cheer. Google parent company Alphabet also showed a 11% increase in revenue, and Microsoft reported a 13% year-over-year increase in revenue and 27% jump in net income.

Consumers sentiment remains wobbly, though. The University of Michigan’s consumer sentiment index for September, released on Friday, shows a slight dip to 63.8 this month from 67.9 in September. The consumer expectations index also took a turn downwards to 59.3 after rising to 65.8 last month.

“While consumers recognize that inflation has slowed down from its peak last summer, they cannot ignore that their budgets remain stretched and their purchasing power reduced,” survey Chief Economist Joanne Hsu said in a statement, adding that “strength in incomes continues to support aggregate spending for the time being.”

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