Shares on Wall Street weakened after data showed this Tuesday that U.S. retail sales increased more than expected in September, suggesting the economy ended the third quarter on a strong note. In September, U.S. retail sales exceeded expectations with a 0.7% increase, surpassing the anticipated 0.3% rise. Additionally, a separate report indicated that production at U.S. factories in September outpaced initial expectations, and because of this, investors worry that strength in consumer spending and production could force the Fed to keep interest rates higher for longer.
Sam Stovall, chief investment strategist at CFRA Research, said that while almost nobody expects a November hike, it’s becoming more of a coin toss whether the Fed will raise interest rates in December. JPMorgan strategist Marko Kolanovic anticipates that the majority of adverse outcomes resulting from elevated interest rates are yet to manifest. He highlights an upward trend in consumer loan delinquencies and corporate bankruptcies, suggesting that such trends are likely to persist unless there is a reduction in interest rates.
Higher interest rates will encourage saving over spending in the months ahead and make the debt more costly, and companies that have a bigger credit or other loans with variable interest rates could be in a difficult situation. Higher borrowing costs will hurt corporate profits and discourage businesses from borrowing to invest in new projects, which can hurt economic activity and job creation. And, of course, the flare-up of geopolitical risks adds another headwind and increases tail risks for markets and economic activity.
Investors are concerned that Israel’s increasing retaliation against Hamas might lead to Iran’s involvement in the conflict, potentially triggering global repercussions. However, their apprehension has mainly manifested through actions such as purchasing oil futures and divesting from Israeli assets. Considering all of these factors, the perspective is likely to stay cautious as long as interest rates remain significantly restrictive and the looming presence of geopolitical risks persists.
Therefore, JPMorgan strategist Marko Kolanovic is adopting a defensive stance, maintaining underweight allocations in equities and cryptocurrencies. However, he recommends a boost in the allocation to gold because, during economic downturns, the value of gold may rise, providing a counterbalance to potential losses in other investments. Gold is often considered a safe-haven asset, especially in times of economic uncertainty or geopolitical instability, and investors usually turn to gold as a store of value when other assets are perceived to be risky.
