Over the past three months (since August 1), the S&P 500 index has experienced a significant decline of approximately 10 per cent. This decline can be attributed to the growing concerns surrounding rising bond yields and the apprehension that interest rates might remain elevated for an extended period. These developments are raising worries about the potential adverse impact on the US economy.
Why is the ‘mother US market’ in stress?
The US market is struggling because of the persisting concerns over higher interest rates, sticky inflation, surging bond yields and unimpressive Q2 earnings.
It is widely expected that interest rates will continue to stay elevated through the first half of the upcoming year. Many experts suggest that the prospects of a return to a low-interest-rate environment are not within immediate sight.
Arvinder Singh Nanda, Senior Vice President at Master Capital Services pointed out that a few important factors impacting the US markets are the US 10-year bond yield crossed 5 per cent on hawkish commentary by US Fed Chairman Powell hinting at more rate hikes to control inflation.
“It is expected that there will be further rate hikes by the US Federal Reserve as inflation is still not in control. The US unemployment rate also spiked to 3.8 per cent in August, the highest since Feb 2022. Non-farm payroll increased by 1.87 lakh. Wage growth slipped showing a slowdown in the US labour market due to pressure from interest rate hikes. We expect the US market to be pricing in recession by considering the above US economy numbers,” said Nanda.
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Is the US market pricing in a recession?
As of now, there is no indication that the US economy is slowing down. The US economy grew at an annual rate of 4.9 per cent in the July to September quarter, according to the government’s first estimate. According to media reports, the US economy grew at the fastest pace in nearly two years, buoyed by a strong consumer in spite of higher interest rates, ongoing inflation pressures, and a variety of other domestic and global headwinds.
Also Read: US GDP growth beats Street estimates, expands an annual rate of 4.9% in Q3
Abhishek Jain, Head of Research at Arihant Capital Markets said as of now, there is no clear evidence of an impending recession.
“The US Retail Sales of Merchandise Inventories (ROMI) suggest strength. It’s worth noting that the market correction follows a robust rally earlier this year,” said Jain, adding that while the recent decline in the US market may trigger a further correction of several per cent, examining the underlying factors driving market movements within the broader economic context is crucial.
“Even with the correction, if we examine the annual returns for the Nasdaq and other indices, they still appear reasonably strong for the year. While the market may be experiencing turbulence, it doesn’t necessarily signal an imminent recession, and there are positive indicators to consider,” said Jain.
Notably, year-to-date, the S&P 500 index is up about 8 per cent.
Manish Chowdhury, Head of Research at StoxBox said that equity markets have slowly started to discount the long-term implications of the high-interest rate environment in the US.
“With 10-year treasury yields in the US close to 5 per cent, the S&P 500 return in the near term would be more a function of the trajectory of bond yields rather than corporate earnings which have been fairly strong in the last few quarters,” Chowdhury said.
Should Indian investors be concerned?
Should Indian investors be concerned about the recent turbulence in the US market? Experts say that the trends in the US market will influence the mood of the domestic market also as the US economy is the world’s largest economy and negative news from the US markets could affect the global markets, especially in the short term.
With the advent of globalisation, global economies and financial markets work in sync. Therefore, the US Fed’s interest rate moves, bond yields, gains in the dollar index, commodity prices, economic slowdown, and fluctuation in crude oil prices can significantly influence the Indian stock market.
Chowdhury of StoxBox believes that investors need to be cautious about select sectors such as housing and banking as mortgage rates in the US hover close to multi-decadal highs, with economic indicators still not reflecting the effect of an almost 18-month-long interest rate hike cycle.
However, experts say that in the last few years, the dependency of Indian market relative to the US market has reduced significantly.
According to a MintGenie report, till a decade back, the correlation between the US and Indian equity markets used to be 0.6 to 0.7 which reduced further to 0.4-0.5 currently. The reasons are multiple – the domestic nature of the Indian economy, strong domestic inflows and less sensitivity to global market cycles.
The outlook of the Indian economy remains robust which could limit the impact of global cues. Experts suggest betting on domestic-oriented sectors for the long term. With inflation coming down to the US Fed’s 2 per cent target level, interest rates will also come down. This will dispel the gloom in the market.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Updated: 27 Oct 2023, 02:08 PM IST