September 27th 2023, 4:18:09 pm
(about 2 months ago)
North American equities dropped this week as investors are losing their confidence in the resilience of the economy and the impact of higher for longer interest rates on the markets. S&P 500 and Nasdaq dropped 3.8% and 4.5% respectively in the past five days, while Canada’s S&P/TSX Composite declined 3.15%.
Following the higher-than-expected inflation number in August for both the US and Canada, the markets are adding to the odds of central banks increasing rates slightly more and keeping them elevated for a longer period. The higher interest rates have been continuously shrugged off by investors but the thought of having them as the new normal for an extended period of time could be detrimental to equities.
US six-month and two-year treasury notes are hovering around 5.5% and 5.1% respectively with the longer-dated ones all standing over 4.6%. the rates are signaling that higher rates may be the new norm.
The market is facing a double-sword situation, where no recession means the Federal Reserve may even increase interest rates higher which could hurt equity markets. On the flip side, in case of a recession, many companies could face earnings contraction and again overall negative gain for stocks.
The higher oil prices are also another concern with West Texas Intermediate crude climbing over $90 per barrel. Energy prices could push inflation further higher. Some analysts now forecast that rates in the US and Canada could climb to over 7%, the rate at which it is impossible to think something will not break.