Stocks dropped on Wall Street on Wednesday as investors lost confidence that the Federal Reserve will decide to decrease interest rates anytime soon and another losing day in a short week arrived.
The Dow Jones Industrial Average (DJI) fell approximately 0.6% and the S&P 500 (GSPC) lost about 0.7% of its value. The heavily tech-focused Nasdaq Composite (IXIC) fell more than 1%.
After Saudi Arabia and Russia remained with output cutbacks, WTI crude oil (CL=F) is trading at its highest level since November and gained another 1% on Wednesday. This rekindled stock market concerns about “sticky” inflation and pushed down the closing prices of all three main US indexes on Tuesday.
Investors are discussing whether these pricing pressures would persuade policymakers to keep rates higher for longer as the Fed’s meeting on September 20 approaches.
Worries about waning demand are also being fueled by negative statistics coming out of China and Europe, which might weaken the US economy’s so far demonstrated resiliency. German industrial orders unexpectedly dropped sharply in July, fueling fears of stagflation.
In light of this, August’s new PMI figures for the US services sector were keenly scrutinised for indications of inflation. The ISM rating was 54.5 instead of the anticipated 52.5, marking the seventh consecutive month of increased activity.
Prior to this, official data revealed that the US trade deficit grew less than anticipated in July as exports increased 1.6% after three consecutive months of declines. Inflation and wage growth may be decreasing, according to data from respondents in the Federal Reserve’s Beige Book, which was also issued on Wednesday.
In numerous districts, firms found it difficult in August to shift expenses onto customers because production costs are rising more quickly than prices, according to the Fed’s Beige Book released on Wednesday.
The Fed’s 12 bank districts’ anecdotal evidence is compiled in the Beige Book. When the central bank officials meet for their policy meeting in two weeks, they will use this information.
The Federal Reserve hiked interest rates in July for the eleventh time since March 2022, which may have been the first of two rate increases planned for the rest of the year.
On September 19-20, the Fed will convene its next policy meeting. Officials are anticipated to take a break and keep interest rates unchanged in the range of 5.25%–5.5% to ensure that inflation data continues to reflect cooling.
The majority of districts stated that price rise generally decreased, with the manufacturing and consumer goods sectors decelerating more quickly.
Districts across the nation had muted job growth as businesses continued to struggle with a lack of qualified candidates for open positions and a small pool of available positions.
This pattern has increased salaries while keeping power in the hands of the workforce.
As the S&P 5000 index has historically had a terrible month, stocks have fallen. The Chief Investment Strategist at BMO Capital Markets, however, believes that the market’s next move will most likely be upward.
The bull case scenario of higher US stock prices through the end of the year, according to Belski, is the path of least resistance. “Yes, there is still a fair amount of uncertainty to be resolved in the coming months that will likely lead to shorter periods of heightened volatility, but we continue to believe that,” Belski wrote on Tuesday night.
Belski names several significant tailwinds. For starters, even though September has traditionally been negative for equities, gains are typically seen throughout the rest of the year when the market has increased by more than 15% through August. For the first time since the third quarter of 2021, profits are being updated during the first two months of the quarter, as Yahoo Finance’s Myles Udland observed earlier this week in the Morning Brief.
Furthermore, Belski believes that high yields won’t be a stock market detractor over the long term and points out that recent strong economic data indicates that the US economy “can and should avoid disaster.”
The services PMI came in at 54.5%, exceeding Wall Street expectations of 52.5 and the 52.7 reading from the previous month. The increase made this the seventh month in a row that the services reading has exceeded 50, which is regarded as a sign of economic progress. The reading was also the highest since February.
“This series had been showing steady deceleration from the explosion of reopening activity in 2021 through the first half of 2023,” said Thomas Simons, a US economist at Jefferies, in a note on Wednesday. “The indicator fell below 50 in December 2022, and more recently, at 50.3 in May, it came dangerously near to contraction zone. The recovery since May reveals some hopeful indicators of a bottom and proof of a strong economy.
Roku now anticipates third-quarter net revenue in the range of $835 million to $875 million, with adjusted EBITDA in the range of negative $40 million to negative $20 million, excluding charges related to items like severance and the removal of particular content from its streaming platform. This is higher than its earlier Q3 prediction, which called for revenue of about $815 million and a negative adjusted EBITDA of $50 million.
Regarding the unexpected increase in guidance, analysts voiced their opinions. JPMorgan reiterated its Overweight recommendation on the company.
Given the ongoing Hollywood strikes, JPMorgan analyst Cory Carpenter stated in a note on Thursday, “We (and investors) initially thought Roku’s 3Q revenue guide was conservative, but a 7% increase (at the high end) two months into the quarter was certainly not expected.”