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Investors reacted negatively to the Federal Reserve’s commitment to maintaining high interest rates, resulting in a sell-off of stocks and bonds. The S&P 500 experienced its worst session since March, and US Treasury yields rose to their highest levels in years. Additionally, the possibility of a US government shutdown added to market losses. However, the impact of a partial shutdown is expected to be temporary, as historically, such shutdowns have been resolved relatively quickly.
The high interest rate environment is anticipated to have varying effects on different sectors. The tech sector has been particularly sensitive to interest rates, and its decline is expected to continue. On the other hand, energy companies are likely to benefit from surging crude prices, leading to a positive outlook for the sector. Despite a small unexpected decline in job claims, negative sentiment is expected to persist as investors seek news indicating a potential easing of interest rates.
To alleviate negative sentiment and provide clarity, the Federal Reserve needs to communicate a more coherent strategy and demonstrate the effectiveness of its policies. Without this, interest rates may continue to rise, impacting stocks and increasing borrowing costs. In terms of investment strategy, focusing on energy and being cautious with tech stocks is recommended, considering the current market conditions.
Japanese Prime Minister Fumio Kishida has also announced reforms to revitalize Japan as a financial center, aiming to stimulate its development in this area.
Transcript
CNA: The business update. Now, investors dumped both stocks and bonds overnight as the Fed’s commitment to keeping interest rates high, damp in market sentiment. Us stocks took a tumble for a third straight day with the S&P 500, marking its worst session since March.
Now, the sell-off in bond markets pushed US Treasury yields higher across the curve, yields on the two-year and tenure notes both hit their highest readings in 16 years. A 30-year bond yields also rose to the highest level since 2011. While the moves were sparked by the Fed’s hawkish tone in its policy meeting, a possible US government shutdown also added to losses after House Republican leaders sent the chamber into recess, dashing hopes that they could pass a bill to temporarily fund the government by in September.
Let’s bring in Tony Nash now, Founder and CEO at Complete Intelligence. Tony, let’s talk about the possibility of a partial shutdown of the US government that’s also weighing on sentiment. And what does this high for longer interest rate environment mean for the US’s growing debt?
Tony Nash: Sure. Thank you for having me. The partial shutdown, really, I think we’re going to hear a lot over the next week or two about how it’s catastrophic. I think the reality is all of those contracts will be paid, all those employees will be paid. The impact on American citizens will be temporary. This is really largely political theater in the US. At least it has been for the last 15 years. The are trying to push back, as you said in your early segment, on some of the Ukraine funding and other funding. In the end, I think everyone thinks they’ll cave. They always cave. This will be a partial shutdown to win over some voters and then everything will be back on in a couple of weeks. So very little will likely change.
In terms of the hire for longer environment, we have to really look at what sectors will be affected. We’ve seen over the past month or so that the tech sector has really taken a hit and it’s a very interest rate sensitive sector. So we expect tech to continue falling into October, November. On the other side of that, we’ve seen crude prices surge and we expect energy companies to continue to surge for the next couple of months. So crypto will likely peak in October, but we’ll likely see energy companies continue with a little bit of a tail until November.
CNA: Well, at the same time, the labor market reinforcing the Fed’s higher for longer stance with a small unexpected decline in job claims. How long could this negative sentiment last? And now that there is certainty that the Fed intends to keep rates higher for longer.
Tony Nash: Yeah, I think now we really have momentum on the negative sentiment. So I think some things have to pop the other way for sentiment to become positive. And we’re also in an environment where good news means that the Fed will stay higher for longer. So while nobody really wants terrible news, they’re looking for some news to indicate that the Fed may ease a little bit earlier. So Goldman Sachs came out earlier today saying that they expect the Fed to cut rates in Q4, previously in Q2 of 2024. Now they’re saying Q4. So that prolongs these higher interest rates and the pain associated with them on mortgages, on credit cards, on borrowing costs generally. And so that will generally hurt a number of stocks and it’ll hit the margins of some companies that have benefited from higher margins over the past couple of years.
CNA: Tony, what are some of the risks as well as upsides you’re looking out for in the fourth quarter of the year?
Tony Nash: Yeah, I think the Fed really has to come out with some clear direction. I think when Chair Powell spoke yesterday, he was hawkish, but he honestly wasn’t really convincingly hawkish. I think the Fed has to have a more well-thought-out strategy. They have to have a more well-thought-out message. And we have to see some things change, whether it’s the momentum in services inflation or the momentum in the job market. Something has to change for investors to believe that Fed policies are having effect. If they don’t believe Fed policies are having effect, then you’ll see interest rates continue to creep up and the Fed continue to have to raise interest rates.
CNA: And, Tony, what is your investment strategy for this period?
Tony Nash: Yeah, again, we’re looking at things like energy right now. That’s where we’re seeing some have seen some interesting activity over the past month. We’re going to see it for the next couple of months. And so that’s really where we’re looking. Again, we’re looking at tech, but on the short side. So tech is not looking very healthy. Tech usually doesn’t do very well when interest rates rise and we’re seeing tech shares and tech valuations really collapse in the face of higher interest rates.
CNA: Tony, many thanks for your insights this morning. Tony Nash, the Founder and COO, Complete Intelligence.