As stock prices peak, markets begin to fear looming threats

Friday, July 16, 2021

NEW YORK (AP) — With the U.S. economy humming, corporate profits flowing and stock prices peaking, investors on Wall Street are beginning to pose an anxious question: Is it all downhill from here?

Financial markets are always trying to set prices now for where the economy and corporate profits are likely to be in the future. And even though readings across the economy are still at eye-popping levels, investors see some areas of concern.

New variants of the coronavirus are threatening to weaken economies around the world. Many of the U.S. government’s pandemic relief efforts are fading. Inflation is raging as supplies of goods and components fall short of surging demand. And the beginning of the end of the Federal Reserve’s assistance for markets is coming into sight.

So far, investors have largely put aside nervousness — broad measures like the S&P 500 and Nasdaq composite are hitting record highs. Major stock market averages, in fact, have nearly doubled since bottoming in March 2020.

The U.S. recovery from the recession is proceeding so quickly that many forecasters estimate that the economy will expand this year by roughly 7%.

That would be the most robust calendar-year growth since 1984. Outside the U.S., too, economies are showing sustained growth. The Chinese economy, the world’s second-largest, has slowed sharply from last year, though Beijing said it grew nearly 8% in the April-June period. And among the European countries that use the euro currency, growth for 2021 is expected to reach a brisk pace of nearly 5%.

Still, some sharp moves underneath the stock market’s surface and across other markets show newfound hesitance and anxiety about the potential economic threats. Yields on longer-term U.S. government bonds have sunk, for example, while stocks of companies most closely tied to the strength of the economy have slumped.

For now, many voices on Wall Street see the nervousness as merely a blip: They are forecasting stocks and bond yields to rise through the year as the economy and corporate profits continue to grow. Many factors are behind the recent shifts in markets, particularly the sharp drop in bond yields, including some technical ones that likely worsened the swings and may be short-lived.

But some of those same analysts also acknowledge that the shifting signals in markets may be an inflection point following months of gangbusters performance and raging optimism. The fear isn’t that economic growth may slow. It’s that any one of threats to the economy will weaken growth too much, too quickly and perhaps even derail the recovery from the pandemic recession and puncture corporate profits.

“We don’t see it stalling out or reversing, but it’s clearly aging,” Rich Weiss, senior vice president at American Century Investments, said of the economy’s recovery. “We have this whole deceleration theme going on that ‘The Best Is Yet

To Come’ is not the case anymore. We’ve definitely peaked.”

Asked why investors would worry about a slowdown when growth rates look so high as to be unsustainable, Weiss suggested that uncertainty can often lead investors to consider a worst-case scenario.

“The unknown of what you’re going to do looms large,” he said. “We’ve been riding this humongous reopening economy and reflation trade. Yes, it’s going to slow down, but what is it going to slow down to? If the job market is still weak, do we slow down to something on the order of 4% to 5%” economic growth, “or does it slow down to 2%? That would be a negative surprise that could roil the bond markets and the stock markets.”

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