Weekly Market Insights
Stock performance was mixed last week. The S&P 500 gained over 1.5% and the NASDAQ soared 3.2% while the Russell 2000 dropped 1.25%, and the Dow Jones Industrial Average declined 0.54%.
Last week’s economic data indicated a resurgence of disinflation as both CPI and PPI beat expectations. The highlight was Wednesday’s CPI report, which posted the best inflation numbers in months. Thursday’s PPI report reinforced this trend with a headline decline and flat core. Together, CPI and PPI data confirmed solid downward pressure on inflation in May. However, last week’s data also hinted at slowing growth as weekly jobless claims rose to the highest level since August. This is a rather volatile data set, but its trend is signaling potential labor market weakness while Consumer Sentiment came in well below expectations.
The Fed’s decision last week largely suggested the possibility of one or two rate cuts in 2024, up from the market’s previous expectation of one. Between Fed Chair Powell’s comments and the CPI report, the likelihood of a September rate cut slightly rose.
What really drove the tech-heavy NASDAQ and S&P 500 higher was AI enthusiasm as some of the technology giants including Apple, Oracle, and Broadcom made AI related progress headlines while Treasury yields plummeted amidst the underwhelming economic data and expectations for Fed rate cuts.
Key Takeaway:
Overall, last week’s economic and Federal Reserve data were positive for both the equity and bond markets as it reinforced disinflation and impending rate cuts but it’s important to note that these factors have already priced into the stock market. Moderating economic growth helping to bring down inflation isn’t exactly a perfect scenario, and once again, we are seeing a divergence between tech stocks and the “rest of the market”. In fact, last week’s new highs in the S&P 500 were not matched by new highs in the major Advance-Decline Lines, NYSE Bullish Percentages, or Net New High Lines while commodity based economic indicators have pulled back strongly. Weakening market internals deserve our attention, especially during times of “full valuation”.
The Week Ahead:
The key reports to watch this week are Tuesday’s Retail Sales and Industrial Production figures along with Friday’s Global Flash PMIs. Retail sales are particularly noteworthy as they’ve been stagnant for months, and a decline would signal more evidence of a slowdown in economic growth.
Staying with the growth theme, we will also get an initial look at June activity through the Empire Manufacturing Index released on Monday and the Philly Fed Manufacturing Index Thursday. Although volatile, these metrics offer an early glimpse of economic activity.
Source: Trading Economics (https://tradingeconomics.com/united-states/calendar#)
Tidbits & Technicals: (New developments will be denoted via***)
Current Headwinds:
- Valuations seem frothy given the current rate environment, leaving the markets subject to a potential swift pullback!
- “Higher for Longer” – Risk that the Federal Reserve waits too long to begin lowering rates and threatens economic growth.
- ***10-year Treasury yields collapsed last week to their lowest levels since March of this year.
- *** Very narrow market participation driven primarily by mega cap tech and AI related companies
Current Tailwinds:
- Optimism surrounding Artificial Intelligence (AI)
- The Federal Reserve potentially cutting rates in the future.
- Strong Labor Market
- Solid Economic Growth
- Continued Earnings Growth (the pace of which may be slowing)
- Momentum
Sentiment:
- Credit Spreads remain tight, hitting their lowest levels recently since peaking in 2022 signaling the bond market (aka “Smart Money”) is not worried about a recession in the near future.
- The VIX (CBOE Volatility Index) is back to the lower levels of the complacency zone.
- ***The CNN FEAR & Greed Index remains in the Fear category
Intermarket Trends:
- The major Indices (Dow Jones Industrial Average, S&P 500, and NASDAQ) recently posted new highs signifying a positive trend.
- ***Interest rates have been volatile lately but appear to be retreating at the present time.
- The US Dollar is trading near the upper end of this year’s trading range due to foreign central banks being the first to cut rates and others taking further rate hikes off the table while the Fed continues its campaign of tough rhetoric.
- Gold has been consolidating near record highs.
- ***Industrial Metals which raced higher recently, have collapsed on the recent weaker economic data
- Oil futures have pulled back from recent highs and are trading in the middle of their one-year trading band.
Tying it all together:
The economy and market are currently stable, seemingly driven by four main factors since October: strong growth, falling inflation, expectations of Fed rate cuts, and the strength of tech stocks. These drivers remain robust despite occasional alarming headlines, which are often countered by subsequent data releases.
In April, stocks declined when it seemed the Fed might not cut rates in 2024. However, market expectations have since shifted to anticipate one or two rate cuts in 2024, with one currently predicting around a near 60% chance of the first cut occurring in September. (source: CME FedWatch Tool) Earlier this year, there were predictions for as many as seven rate cuts. While these shifts might cause short-term volatility, our focus is not on short-term fluctuations. Whether the Fed cuts rates in September, December, or any other month is less important than the certainty that a cut is coming.
In the long term, economic growth is the primary concern. While growth is currently strong, we must remain vigilant for signs of a slowdown, as this could negatively impact the markets. High interest rates are not a major issue as long as growth remains solid. For now, the positives—full employment, declining inflation, economic growth, strong earnings—significantly outweigh the negatives. As long as these conditions persist, the environment remains favorable for risk assets, however, valuations are running high and broad equity participation is narrowing.
Historically, the best approach in such environments is to ensure that one’s overall portfolio aligns with their risk tolerance and long-term goals.
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Important Disclosures:
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The statements contained herein are solely based upon the opinions of Edward J. Sabo and the data available at the time of publication of this report, and there is no assurance that any predicted or implied results will actually occur. Information was obtained from third-party sources, which are believed to be reliable, but are not guaranteed as to their accuracy or completeness.
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