Stock Market Crash Alert: 3 Potential Triggers Loom This Week

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  • A range of catalysts could take the market lower in short order, with investor fears centered on three key areas.
  • Macro data and Federal Reserve monetary policy are, as always, in the mix for so many investors.
  • Here are some specifics around what’s important to watch and why these factors could influence the market’s performance moving forward.
stock market crash - Stock Market Crash Alert: 3 Potential Triggers Loom This Week

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With impressive performance in recent months, the S&P 500 has risen 55% since September 2022. However, some experts see an impending pullback amid the current optimism. According to the July 2024 American Association of Individual Investors, this has led to a 26% increase in investor pessimism. It also reflects the view that various macroeconomic hurdles could lead to a potential downturn on the horizon.

There are a myriad of factors that could play into this increased pessimism. That said, I think three are perhaps among the most important to watch right now.

Let’s dive into three potential headwinds investors should consider as potential catalysts for a future stock market crash.

Powell’s Testimony Before the House of Representatives

Fed Chair Powell testified before the U.S. Senate yesterday, stating he wouldn’t discuss rate change timing but hinted at a likely decline. He noted increased two-way risks (namely, on the employment front), with the Federal Reserve clearly now not just factoring inflation into its calculus for where interest rates should be. The Fed chair also discussed a cooling yet strong labor market, which he didn’t see as a major inflation driver. His remarks kept a September rate cut possible, with the bond market now pricing in a 75% chance of two cuts this year.

The report also highlighted the Fed’s challenge in controlling inflation without causing a recession. Keeping the Fed funds rate at a 23-year high aims to make borrowing costlier, discouraging spending to reduce inflation to 2% from just under 3%.

Higher rates pressure inflation by slowing the economy, but there’s a risk of the Federal Reserve causing a recession as unemployment rises. This situation is one which has been avoided so far. However, Powell has repeatedly stated that rate cuts will depend on inflation and economic data, aiming for a 2% inflation target. Cutting rates too soon or too much could reverse progress while cutting too late or too little could harm the economy and employment.

The hearings allowed lawmakers to pressure the Fed despite its supposed independence. Senator Elizabeth Warren criticized the Fed’s rate hikes, arguing they raised mortgage costs and hurt housing affordability. She, along with Senator Jacky Rosen, urged Powell to cut rates to reduce housing-related inflation and lower Americans’ monthly expenses.

CPI Report Due Out on Thursday

According to market analysts, consumer prices may fall a bit lower in June, showing a slight decline in inflation. The Bureau of Labor Statistics’ upcoming report is also expected to show a 3.1% annual increase in the CPI, which is lower than the 3.3% in May. The decline could cause the Fed to cut rates and reduce borrowing costs.

Fed officials kept rates at a 23-year high to curb inflation, which peaked in 2022. Policymakers are waiting for inflation to approach the 2% target before considering cuts. As of Monday, markets predicted a 75% chance of a rate cut in September. With inflation cooling, the Fed may focus on avoiding an economic slowdown, especially after June’s rise in the unemployment rate.

The report’s details will reveal inflation’s effects on finances and the Fed’s outlook. Inflation is also set to decline due to falling or stable prices for household items like food and gas. According to Wells Fargo (NYSE:WFC), lowered grocery costs were due to the promotions made by major retailers. Excluding food and gas, core inflation likely remained at a 3.4% annual increase, which policymakers closely monitor for setting rates.

Deutsche Bank (NYSE:DB) economists predicted core prices would stay high due to potential rebounds in car insurance and airline tickets. However, Wells Fargo expected inflation to moderate through 2025 as consumers hit spending limits, curbing price increases in goods and services.

June PPI Report Due Out on Friday

Stocks skyrocketed higher on Monday morning as analysts put forward their expectations of where crucial economic reports will land this week. Among the reports to be released is the Producer Price Index (PPI), set to release on Friday. 

In May, a 0.2% decline in PPI was reported by the Bureau of Labor Statistics. Final demand prices rose 0.5% in April but declined 0.1% in March. The index for final demand showed a 2.2% increase in the past year.

Moreover, the decrease in May was also due to the 0.8% drop in final demand goods prices, while prices for final demand services were unchanged. Prices excluding utilities, trade services and food were stable in May, following a 0.5% increase in April.

The upcoming PPI report on Friday is expected to forecast a 0.1% month-over-month increase. The inflation data will also guide investor decisions and other things, like the Fed’s interest rate policy. Again, expectations are that the Fed will cut rates as the PPI comes down, but we’ll have to see how the data come in first.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.


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