Weekly Market Insights
Equity markets rallied for most of last week, with Treasury yields falling amid the first major central bank rate cuts and strong AI enthusiasm. Despite increased volatility on Friday the S&P 500 still achieved a weekly gain of 1.32%.
Early in the week, stocks surged, seemingly driven by optimistic outlooks from leading AI companies, but these gains were largely undone after a significant miss in the May ISM Manufacturing Index rekindled economic slowdown concerns. These worries persisted after a weak JOLTS (Job Openings and Labor Turnover Survey) report and a downward revision to the Atlanta Fed’s GDPNow reading on Tuesday. However, the subsequent drop in yields eventually provided a tailwind for stocks. (Yes, the market can’t decide what it really wants — a strong economy or rate cuts). Additionally, an announcement from Elon Musk that Tesla would spend $3 to $4 billion with NVIDIA this year helped to further fuel the AI enthusiasm trade.
The rally continued on Wednesday, with the S&P 500 hitting new records following the first major central bank to cut rates, the Bank of Canada, but the big news of the day was a surprisingly better-than-expected ISM Services Index release, which eased some of the recession fears from earlier in the week. On Thursday, momentum slowed despite the ECB’s expected rate cut, due to news of U.S. antitrust investigations against NVIDIA and Microsoft, and in anticipation of Friday’s key jobs report. The jobs report exceeded expectations with 272,000 job additions compared to the anticipated 185,000, and an unexpected wage rise caused a major spike in yields as investors adjusted their rate cut expectations despite a slight uptick in the unemployment rate. Interestingly, the S&P 500 rallied to new all-time highs mid-day before pulling back to just about break even on the day.
Key Takeaway:
Last week’s economic data felt like a roller coaster ride. Ultimately, the key events favored economic growth and that’s a good thing going forward, even though it likely pushes back on rate cuts coming sooner than later. Equity investors seemingly took the data in stride despite the bond market’s reaction on Friday.
The Week Ahead:
Last week we got a glimpse at growth and employment and this week is all about inflation and the Federal Reserve’s Dot Plots (each members forward looking rate expectations). Wednesday will kick off the events with CPI and Core Inflation data along with the Fed Meeting and FOMC Economic Projections. Thursday, we will get a glimpse at PPI and wrap things up on Friday with the University of Michigan Consumer Sentiment Preliminary read for June.
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 early last week only to spike on Friday. The current interest rate volatility is of historic proportions.
Current Tailwinds:
- Optimism surrounding Artificial Intelligence (AI)
- The Federal Reserve pivoting from raising rates to potentially cutting in the future.
- Strong Labor Market
- Solid Economic Growth
- Continued Earnings Growth (the pace of which may be slowing)
- Momentum
- Participation is broadening with cyclicals taking a leadership role while the tech-trade begins to fade.
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 inched into the Fear category last week despite the rise in equities. The 7 components that make up the index are generally mixed with regards to their readings at the present time.
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 after posting new his for the year in the past couple of weeks.
- 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 raced higher recently, and copper recently broke out of a multi-month trading range and have been consolidating the past couple of weeks.
- 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 50% 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. 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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