In recent times, market conditions have been reminiscent of those observed two decades back. Sustaining this prosperity, however, remains a question.
Until this week'spause, the market's recent performance had an intriguing narrative.
The S&P 500 climbed for 37 out of the past 51 weeks, reaching a milestone achieved in 1989 and 2004. Furthermore, the benchmark index is anticipating consecutive annual gains above 20% for the first time since 1997, aiding in the recovery of American retirement accounts from 2022's substantial losses.
However, this positive trend seems to be slowing down.
Although the tech-focused Nasdaq and S&P 500 managed modest gains on Thursday, the Dow's decline suggests some apprehensions remain.
Is this week's dip merely a temporary setback? Three significant challenges inhibit the current rally's persistence.
Political instability
With the White House race appearing to be a close call, investors have grown increasingly uncertain about the possibility of former President Donald Trump securing the election. Although polls remain neck and neck, market prediction markets have shown a shift in Trump's favor since the beginning of this month.
As Steven Ricchiuto, chief US economist at Mizuho Securities, stated on Wednesday afternoon, "The logic here is straightforward: Candidate Trump has advocated for increased import tariffs to rejuvenate domestic manufacturing. These tariffs are predicted to instantly surge the price of consumer goods and, inadvertently, reverse the goods deflation that has contributed to pulling inflation closer to the Fed's 2% goal."
In addition, escalating hostilities in the Middle East have resulted in significant fluctuations in oil prices, particularly following Iran's missile strikes on Israel.
Market warning signals
The stock market currently appears pricey. Over an extended period, stock prices in relation to corporate earnings have only reached their current levels during the dot-com bubble of the late 1990s and in 2021. In both instances, the market's enthusiasm did not last long, and stocks subsequently plunged sharply.
Deutsche Bank experts caution that the current rally might prove challenging to sustain given these soaring valuations.
Moreover, the US is projected to run large budget deficits, ranging from 7-9% over the following few years – deficits often seen only during major wars or economic crises, according to Henry Allen, a strategist at Deutsche Bank, in a recent note.
Running out of steam?
The economy's enduring strength through 2024 has been both a blessing and a curse. While it has aided in pushing stocks higher, it also makes it harder to exceed expectations moving forward.
Investors are closely monitoring several crucial events that could decide whether this market rally persists or not. Upcoming are significant tech earnings for Apple, Meta, Alphabet, Amazon, and Microsoft. The presidential elections and the Federal Reserve's subsequent policy decision are scheduled for early November.
In light of these challenges, some investors might choose to diversify their business ventures and explore alternative investing opportunities.
Despite these obstacles, confident investors may still see this as an opportunity to further invest in the market, taking advantage of potential undervalued assets.
