Many factors may have triggered the stock market’s recent selloff. A slew of earnings warnings and a hot inflation reading have revived fears about the dreaded “stagflation” scenario that typically brings higher prices and slowing economic growth. Meanwhile, interest rates are soaring, which can draw investment dollars away from stocks and into bonds — where yields are much more lucrative. The Dow is now down more than 300 points this week, while the Nasdaq has slumped nearly 6%.
But for all the angst, many investors still need to be ready to close up shop for the year. They want to give the economy a chance to defy recession predictions and show more signs that inflation is declining. That could help persuade the Federal Reserve to cut interest rates, making access to capital cheaper and boosting consumer spending.
The next big data point comes on Friday when the core personal consumption expenditures price index will be released. That is the Fed’s preferred measure of underlying inflation, and traders expect it to be more excellent than expected. If that happens, it might ease expectations that the Fed will cut rates soon, and it could help calm jitters about the economy’s health.
In Europe, shares stalled on Thursday after a late sharp selloff on Wall Street left traders scratching their heads. The markets in Germany and France fell a fraction, while the U.K.’s FTSE 100 climbed slightly. The S&P 500 and the Dow also slipped, but they were off their session lows.
Several concerns, including geopolitics, may have spooked investors as Russia’s war on Ukraine persists and tensions with China linger. In addition, 43 million Americans will begin getting their first student loan bills next week, which could stifle spending. The oil market is also vulnerable to political developments in the Middle East, where tensions are rising over Iran’s nuclear program.
In the tech world, the gains in the Nasdaq 100 have been driven mainly by a handful of large stocks with sky-high valuations. That makes some analysts worried about the index’s long-term health. Donald Calcagni, chief investment officer at Mercer Investment Advisors, says that while the Nasdaq is now up 51% for the year, it could be in danger of getting ahead of itself. He says the index might need to be reweighted, or at least rebalanced, as it has become too focused on the most frothy parts of the market.