Stock markets ready for a correction: there is no point in ignoring the signals

THE stock marketsespecially the American ones, have repeatedly updated theirs historical recordsin spite of one Fed which has clearly disappointed investors, first anticipating and then backing away from a rate cut of interest. If six cuts were expected at the beginning of the year, now at most one or two will be made before the end of the year and nothing is guaranteed, because inflation remains too high in USA. Even the ECB, despite having announced a 25-point cut last week, does not guarantee anything for the future and confirms that it will move based on the data.

So what is continuing to support the markets? Why do they keep moving higher? And what are we expecting on the economic and corporate front for the near future?

The market situation

The market situation is more than positive, which suggests that a correction is upon us. The three American indices have updated their historical records recently. The most sensational was that ofS&P 500 which flew beyond 5,300 points, bringing the resistance of 5,400 points very close. Since the beginning of the year, the index has gained 13.4%.

Also strong Nasdaq 100, which has finally broken through the 19,000 point threshold, with an increase of 14.5% since the beginning of the year. After exceeding the 38 thousand threshold, the market also appears resilient Dow Jones at 38,868 points, although the performance since the beginning of the year is less impressive (+3.1%).

The state of the economy

The US economy this year it showed itself more resilient than expected, despite still high inflation, which convinced the Federal Reserve to wait for better times for a rate cut. A cut that is certainly not expected this week, but will be postponed until at least September.

The job marketas confirmed by the numbers on the Job Report, is confirmed in excellent health. This translates into sustained consumer spending and a growth in corporate profitswith the side effect of keeping prices a little high.

The virtuous circle, however, appears destined to be interrupted. According to Michele de Michelis, President and CIO of Frame Asset Management“there are some important managers who maintain that the situation is not so rosy”, as demonstrated by the fact that “in the last conference calls, many managers of listed companies, in an attempt to maintain profit margins, have anticipated cost cuts in the near future which will inevitably be reflected in the labor market. Therefore, it should have a negative impact on the strength of American consumers that has supported the cycle so significantly, with the consequence of pause the virtuous circle (strong labor market / high consumption / high profits) which gave wings to the stock markets”.

Never ignore unmistakable signs

“Lately Warren Buffet brought liquidity to an all-time record of his holding (Berkshire Hathaway, Ed.), precisely at a time when the average of American managers is at its lowest level. This fact usually occurs historically before corrections“, explains the Frame AM analyst, indicating that the market and its operators offer unequivocal signals.

“However, I notice that when American ten-year rates exceed 4.6%, even the S&P 500 index begins to get nervous and this confirms to me that the real risk remains inflation. And since we're talking about inflation, we can't help but look at raw material which have flown in several sectors and could be the third wheel to break the correlation between equity and bonds”, says de Michelis, adding “we will see if Warren Buffett was right this time too”.