Nasdaq Index, Dow Jones, S&P 500 News: Wall Street Faces Potential Summer Slowdown

Stock Market Faces Potential Summer Slowdown Amid Inflation and Election Jitters

The U.S. stock market may experience a more pronounced summer slowdown this year due to inflation concerns and an early presidential debate, factors that could impact the recent rally which has pushed the S&P 500 near record highs.

On Friday, blue chip Dow Jones Industrial Average futures settled at 39069.59, up 4.33 or +0.01%. The benchmark S&P 500 Index finished at 5304.72, up 36.88 or +0.70% and the tech-weighted Nasdaq Composite, closed at 16902.79, up 184.76 or +1.10%.

S&P 500 Performance

The S&P 500 has risen nearly 12% this year, driven by strong earnings and signs that inflation may be falling enough for the Federal Reserve to consider cutting benchmark interest rates. However, investors are skeptical that this rally will continue in the coming months. Historically, summer has been the slowest season for U.S. stocks, with the S&P 500 rising 56% of the time between June and August since 1945, according to CFRA Research.

Seasonal Slowdown and Market Valuations

Summer typically sees lower trading volumes as traders go on vacation and investors wait for fall corporate earnings before making asset allocation decisions. This year, the market faces additional challenges due to uncertainty over the timing of rate cuts and the unpredictable U.S. presidential election.

“Markets are pretty richly valued at this point, and everything has to go right between now and July for the Fed to deliver any interest rate cuts,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute. “We don’t see a lot of potential catalysts for more gains, so there’s a good chance that the seasonal slowdown we typically see will be turbocharged this year.”

Inflation and Treasury Yields

Inflation data will be crucial in determining the market’s direction for the rest of the year, impacting Treasury bond yields and their attractiveness relative to stocks. The S&P 500 is currently trading at a forward price-to-earnings ratio of 21.6, compared to roughly 17.5 in October when 10-year Treasury yields hit near two-decade highs.

Early this year, higher-than-expected inflation dampened expectations for Fed rate cuts in 2024, pushing yields higher. A subsequent dip in price increases in April provided some hope for easing, with the market now anticipating a 35 basis point cut by year-end. However, another high inflation reading in June or July could alter these expectations.

“The real challenge will be on the relative side. If yields were to spike and if it looks like the Fed isn’t going to cut, then investors will move into bonds and cash,” said Ed Clissold, chief U.S. strategist at Ned Davis Research.

Election Uncertainty

The upcoming election race between President Joe Biden and former President Donald Trump adds another layer of uncertainty. Historically, the S&P 500 has performed well between Memorial Day and Labor Day when a first-term president seeks re-election. However, this year’s tight race and an early June 27 debate could heighten investor caution.

“This looks like it will be a fairly tight presidential election, so getting some kind of pullback as investors move to the sidelines is quite possible,” Clissold added.

Market Outlook

Given these factors, traders should prepare for potential volatility and a possible summer slowdown. Inflation data and election developments will be key drivers, influencing investor sentiment and market movements in the months ahead, as reported by Reuters.

Technical Analysis

The E-mini S&P 500 Index is in an uptrend based on the short-, intermediate- and long-term- trend indicators. However, last Thursday’s dramatic closing price reversal top stopped the rally, setting it up for a potential near-term correction.

Should the selling pressure persist then look for a pullback into the 50-day moving average at 5214.89.