Weekly Market Insights
Stocks surged to new highs early last week, buoyed by enthusiasm around AI and leading tech stocks but momentum waned later in the week as investors digested some softer than expected economic data heading into Friday’s options expiration. Despite the stall, the S&P 500 managed a weekly gain of 0.61%, bringing its year-to-date increase to 14.57%.
Last week’s economic indicators presented a mixed picture, once again suggesting a loss of momentum in overall economic activity. While some data points such as the June Composite Flash PMI showed solid improvements in manufacturing and services, others like the Empire Manufacturing Survey and Philly Fed Survey fell short of expectations. Price movements and new orders varied across sectors, indicating a generally solid but slowing economic environment for June. Additional reports highlighted a similar trend of mixed results, with May Retail Sales and Industrial Production showing signs of moderate growth but not meeting anticipated figures.
Last week, the bond market finally settled down from all the volatility of late and the 10-year Treasury yield decreased by only 2 basis points (0.02%), settling near its multi-month lows around 4.25%.
Key Takeaway:
Overall, last week’s economic data did little to change the current backdrop. Despite mixed economic indicators, the overall outlook for U.S. economic growth remained unchanged, with no substantial increase in concerns about a sharp economic slowdown. Consequently, market expectations for rate cuts remained largely the same. Concerns about a potential slowdown or stall in economic growth have largely been just “concerns”. Sometimes the loudest voice in the room gets all the attention but looking at the current intermarket trends, the overall outlook remains steady.
The Week Ahead:
This week’s key economic report comes via Friday’s Core PCE Price Index release. This is the Fed’s preferred inflation gauge as it gives a good indication of true prices across a broad scope, and we will want to see continued moderation. Also of particular interest will be Wednesday’s Durable Goods data, which gives an indication of current business spending and investment trends.
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 pulled back 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 70% 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.
Please feel free to share these commentaries with friends and family and, should you have any questions regarding your current strategy or the markets in general, please reach out to your CIAS Investment Adviser Representative.
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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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