How Long Can Hopes of a "Goldilocks" Economy Sustain U.S. Stocks?
With cooling inflation, resilient economic growth, and strong employment data, investors have been encouraged by the prospect of a "Goldilocks" state in the US economy, leading to an uptick in US stock prices so far this year. Amid lingering concerns around high valuations and the potential for inflation to rebound, some economists have expressed concerns about how long hopes of a "Goldilocks" economy can sustain US stocks.
A "Goldilocks" economy refers to an economic environment that is"just right"- relatively stable, without expanding or contracting too much, and characterized by strong economic growth, low inflation, and low unemployment. For investors, a Goldilocks economy can be beneficial as a steady economic environment generally supports asset growth.
According to Peter C. Earle, an economist at The American Institute for Economic Research, "In a Goldilocks economy, you have a growing economy, the purchasing power is stable, wages rising, and more goods and services available."
Some economists believe that the so-called "Goldilocks" status of the economy is temporary and vulnerable to shifts in monetary policy and current events. Presently, there are two primary concerns in HSBC's recent research:
1）The recent sharp rise in energy prices has further complicated the near-term inflation outlook.
As of August 22, WTI crude oil futures and Brent futures have risen by 13.5% and 12.2%, respectively, since the beginning of the second half of the year. In addition, the upsurge in food prices in combination with continuous wage growth indicates that the war against inflation is far from over. According to the CME FedWatch Tool, Fed funds traders currently view a 15.5% probability of a rate hike for September but a higher likelihood of 45.2% for the hike in November.
"Food and energy are considered leading indicators for core inflation even though they are not included in it," explained Barry Bannister, the chief equity strategist at Stifel.
Fed officials mentioned inflation risks again according to meeting minutes released last week, "Given that inflation is still well above the Committee's long-term goal and the labor market remains tight, a majority of participants believe that there are significant risks for further upward pressure on inflation, which may necessitate additional tightening of monetary policy."
2) The over-optimism and complacency in the markets have, in turn, affected inflation.
HSBC's recent conversations with clients suggest that concerns about a potential recession have eased as news-based sentiment improves. Many economists believe that the current complacency and optimism may be reflected in asset prices, thereby exacerbating the impact on inflation.
HSBC has warned that trouble could potentially arise towards Q4 in the US, which could disrupt the prevailing Goldilocks narrative: "Energy prices have risen quite sharply over recent weeks, which should put upward pressure on headline inflation in August and reduce some of the disinflationary impact of energy prices. Most notably, our economists’ expectations of Q4 headline inflation to average 3.5% y/y is above (Bloomberg) consensus expectations of 3.1% y/y. "
HSBC's economists anticipate a slower Fed easing trajectory, particularly in the second half of 2024, due to a disinflation path that has been slower than expected by consensus. Besides, with the US economy's underlying fundamentals still strong, this would create a challenge to the rather dovish outlook for 2024 shared by both consensus and market pricing.
HSBC: " This, in turn, could prompt a 2022-style temporary sell-off across all major asset classes, with USD cash being the only hedge across major asset classes, alongside a comeback for commodities. "
Source: HSBC, The Motley Fool, Carrington Mortgage Services, Business Insider, Moomoo, CME Group
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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