Mixed Signals in the Stock Market
The stock market is currently sending mixed signals, caught in a tangle of overlapping fears. Predicting the next move depends heavily on which narrative you choose to believe. You could choose to focus on the biggest worry of the week: a series of high-profile bankruptcies in consumer-facing industries that may have exposed an underlying economic weakness that threatens parts of the banking sector.
Banking Sector Concerns
A small number of regional banks reported some bad loans last week. The bankruptcies of a major auto parts maker and a subprime auto lender have exposed major lenders, including JPMorgan and Wall Street finance firm Jefferies, to potentially significant losses. Several lenders claim to be victims of fraud. But assuming these are canaries in the coal mine rather than a series of isolated incidents, it could mean more consumers defaulting on their loans or cutting back on spending with companies that owe their banks a lot of money.
Trade Tensions and Economic Impact
It was only last Wednesday that the markets reached their latest record. But they stumbled after China tightened export controls on key rare earth minerals, the release of which the Trump administration has been negotiating for months. These rare earths are used in virtually everything that beeps, including consumer electronics and military equipment. President Donald Trump said last Friday that he had had enough and threatened to escalate the global trade war again.
The Role of Big Tech and AI
Big Tech and the promise of AI have fueled stocks’ historic rise this year, particularly since April. But analysts have warned in recent months that this is a one-legged stool – and the high valuations of AI companies cannot sustain the market in the long term. Some see echoes of the dot-com bubble of the late 1990s that burst in the early 2000s. Measured by the ratio of the share price to the company’s actual sales, stocks have never been so expensive.
Stagflation and the Fed
Investors have largely ignored the economic impact of President Donald Trump’s tariffs over the past six months as forecasters’ worst predictions of high inflation and a slowing economy failed to materialize. However, inflation is on the rise, albeit slowly. Hiring numbers have fallen rapidly. Trade with the United States has slowed due to higher tariffs. And some consumers have been burdened by rising prices, with defaults and subprime debt increasing for lower-income groups.
Geopolitical Tensions and Oil Prices
Geopolitical tensions in Ukraine and the Middle East may be easing, with meetings scheduled between Trump and his Chinese counterpart; and with Russian President Vladimir Putin. Like the recent ceasefire in Gaza, these meetings have the potential to at least lower the temperature somewhat in some of the most worrying parts of the world. Meanwhile, worries about oversupply have put pressure on the oil market, with the price of Brent and WTI both near their lowest levels in five months – potentially easing the burden of inflation on Americans as gas prices follow the decline in oil prices.
Market Outlook
In the short term, more bad headlines could rock the markets. But not much has really changed: shares are only down about 2% from their record high. If they continue to fall, it could be a good buying opportunity to get back into the market when stocks are relatively cheap. “We would view deeper pullbacks as opportunities to intervene as the bull market still deserves the benefit of the doubt,” Keith Lerner, chief market strategist at Truist, said in a note to clients Friday. In other words, "We’re keeping our powder dry and ready to buy the dip," said Mohit Kumar, chief economist at Jefferies.
