U.S. stock market indexes were already digesting cooler inflation data as last week began, and rate cut probabilities grew as evidence of a potential cooling of the economy started to show.
Tallying last week, the S&P 500 declined by 1.97%, the Nasdaq 100 fell by 3.98%, and the Dow Jones Industrial Average ended the week higher by 0.72%.
U.S Stocks & Major Earnings
Stocks traded lower overall in a mostly orderly fashion last week, with added tensions stemming from the attempted assassination of former president Donald Trump and uncertainty surrounding Joe Biden’s reelection campaign.
As earnings season began, many looked to blue-chip stocks to potentially minimize volatility, and the strength was evident in the Dow’s outperformance last week.
Earnings pick up steam this week, as we get Tesla, Alphabet, ServiceNow, and GE Aerospace results, among others.
As of last Friday’s market close, 14% of the companies in the S&P 500 have reported their actual results for Q2 2024. Out of these companies, 80% have reported actual earnings per share (EPS) above estimates. This percentage is higher than the 5-year average of 77% and the 10-year average of 74%.
Crowdstrike Outage Friday
Major data systems provider CrowdStrike Holdings suffered a major outage on Friday, affecting industries from finance to travel and everything in between.
The outage primarily affected servers running Microsoft Windows operating systems. A morning software update caused the dreaded BSOD (Blue Screen of Death). Given that many companies use CrowdStrike for IT, the impact was pronounced and widespread.
Crowdstrike is advertised as being used by more than half of Fortune 500 companies.
At the close of last week’s trading, Crowsdtrike had shed 17.87%, while Microsoft had shed 3.62%.
Fed Rate Cut Probabilities
According to the CME FedWatch Tool, at the end of last week, there was only a 4.1% chance of a cut at the July 31st Fed meeting. Going out further in time, there was a 98.1% chance for a cut in September.
Slowing inflationary data helped to bring a rate cut right to the center of the table for September.
Retail Sales Flat in June
Amid many predictions of a slowing economy, June retail sales came in unchanged versus Bloomberg economist expectations for a 0.3% decline.
“This report shows that the consumer is holding in there well and maybe is not spending at the heady pace that we saw in the second half of last year but is certainly not falling off a cliff,” Citi senior global economist Robert Sockin told Yahoo Finance. “And I think for the Fed, this will take some urgency off of easing rates, out of fears that the economy may be slowing down more sharply. So I think they’re going to still signal at the July meeting a September cut is very likely, given progress on inflation.”
So, the consensus on the economy seems to be that it is cooling, yet growing.
Meat and Potatoes
It’s an election year. Election years have been known to feature narrative shifts and/or volatility.
Given the length of the inflationary cycle and “higher” interest rates, we could potentially be at an inflection point where economic expansion slows or stalls while the markets get the lower interest rates that they have wanted for so long.
But those who have thought in such a manner prematurely have missed out on broader equity index gains that have been impressive for the past couple of years.
While others panic, let’s be pragmatic. The S&P 500 is the broadest measure of the U.S. economy, and it was only down 1.97% last week after an attempted assassination of a former president. Then there were questions about President Biden dropping out of the race, which, of course, came to fruition on Sunday. That’s 2% on these events so far — not 5% or 10%.
The point is that the broadest measure of the U.S. economy has managed these events in an impressive and orderly fashion thus far. That said, these types of catalysts can potentially correlate to narrative shifts in financial markets.
This Week
We will see how the markets digest the news of President Biden dropping out as we begin the week. Then, attention will turn to Friday’s Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation. We will also get gross domestic product (GDP) data and continued corporate earnings results.
It has been a long time since a substantial pullback in the broader U.S. equity indexes. And so far, the S&P 500 has a total year-to-date return of around 16.30% at the time of writing, even after last week’s 2% selloff.
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Overall, bulls continued to run during the second quarter of 2024 as several major stock indexes broke out of recent trading ranges to the upside.
Tallying the quarter, the S&P 500 increased by approximately 3.90%, the Nasdaq Composite rose by close to 8.1%, and the Dow Jones Industrial Average decreased by nearly 1.7%.
Economy
Rewind to the beginning of the year, and the talk of the town was as many as six rate cuts to come this year. Remember that? Well, courtesy of sticky inflation (which has recently shown early signs of potentially softening), the narrative has changed significantly since then.
Current expectations are for one rate cut in 2024, with the Fed’s ability to cut near the presidential election in question.
Inflation
The year-over-year Consumer Price Index inflation rate declined in Q2, with the last CPI reading of the quarter showing consumer pricing cooling slightly month-over-month in May and year-over-year inflation running at 3.3%. It is too early to say if the trend will continue, as many market bulls desire.
Core CPI (which removes more volatile food and energy from the metric) dropped to a three-year low of 3.4% in May, potentially bolstering the case for rate cuts down the line. This metric illustrates just how much the necessities of food and energy contribute to the inflationary pressures here in America.
U.S. equities loved seeing inflation metrics tick lower throughout the second quarter, and the S&P 500 continued to make fresh all-time highs.
Labor Market
Labor markets remained mostly steady to higher throughout Q2, with payroll gains (206,000 in June, 272,000 in May, 175,000 in April) in each month and June and May data beating analyst consensus expectations.
For June, the unemployment rate rose to 4.1%, higher than the estimated 4.0% and the highest level since November 2021. The unemployment rate has inched higher each month for the past three months, potential signs that the Fed’s rate hike crusade has dampened the U.S. economy. You wouldn’t know it by looking at the S&P 500!
Quarterly Fed Expectations
The second quarter featured two Federal Reserve (Fed) policy meetings. The Fed left rates unchanged both times, in line with market expectations. The result is a current target overnight lending rate of 5 – 5.25%.
More importantly, the Fed has set expectations that it will cut rates only once in 2024.
In the third quarter, there will be two Fed meetings: July 31st and September 18th. As of early July, markets were pricing a 93.3% probability of no rate cut in July and a 70.8% probability of a 25-basis-point cut in September, per the CME FedWatch Tool.
Pre-Election Rate Cut Debate
Even with a 70.8% probability of a Fed rate cut at the September meeting, much controversy surrounds such a cut, as some market participants argue that a cut could bolster the economy and show potential favoritism to the incumbent. This will likely remain a topic of discussion as the time remaining until Election Day ticks down.
Treasuries
Courtesy of slowing inflation data and Fed rate cut expectations, Treasury yields fell in the second quarter by more than 30 basis points from their April peak, ending the quarter near 4.37%.
As a result, holders of bonds have seen some well-deserved price appreciation since April. The Morningstar Core Bond Index gained 0.17% for Q2, and high-yield bonds tacked on 1.07% for the quarter, with the longer end of the curve lagging the shorter-term counterparts.
Generational Opportunity in Bonds?
It has been a rough patch for bond investors, to say the least, but there is hope!
Is it so bad that it is good? Some experts say yes. It has been 46 months since the bond market made an all-time high.
Looking at the Bloomberg US Aggregate Bond Index’s largest drawdown periods from 1976-2024, we can see that this drawdown has reached extreme levels. Should inflation continue to decelerate or decrease, it could be a time when smart money looks to bonds, given the value proposition.
Not as trendy as AI-fueled stocks, bonds do stand the test of time, and there is ample math that supports these fixed-income assets. Some food for thought entering the third quarter!
Forgotten Yield Curve Inversion
The longest yield curve inversion in U.S. history passed the two-year mark on July 7th. Seemingly forgotten as of late, the abnormal phenomenon has historically portended economic contraction or recession, but those who have banked on that thus far have missed a large rally in equities.
It is election season, so anything is possible moving forward.
Wall Street Wisdom Debunked
The classic Wall Street adage of “Sell in May and Go Away” did not transpire in the second quarter — for the second year in a row!
That’s right. Despite the higher interest rate environment, an inverted yield curve, and seasonality, the S&P 500 was positive for two out of three months in the second quarter. After declining by 4.16% in April, the S&P 500 added 4.80% in May and 3.47% in June, a solid quarter for the broad market average.
Tech and artificial intelligence (AI) continue to outperform the broader market, and AI-fueled gains were a prevailing narrative once again in the second quarter.
Technology Strength, Materials & Industrials Lag in Q2
On the subject of AI and tech, below is the overall performance of the technology sector in the second quarter, along with other popular stock sectors and how they fared in Q2 2024.
Dividend Stocks Lag in Q3: Turning Point Ahead?
With the ten-year yield near 4.268% and, of course, the two-year yield higher at around 4.624%, it is not rocket science why blue-chip dividend-paying stocks have lagged as their trendier tech and AI counterparts have caught massive inflows of investor cash.
But those who have been around the markets for a while know that trends can be temporary, and U.S. giants like Coca-Cola, Disney, and 3M, for example, have stood the test of time and will not be going anywhere anytime soon.
Should interest rates decline, as many expect, dividend-paying stocks could once again come back into favor. We see that defensive sectors like utilities did well in the second quarter — perhaps a sign of things to come.
More food for thought for those seeking further portfolio diversification heading into Q3.
From Q2 to Q3: A Summary
Of course, much attention will continue to be paid to inflation data and Fedspeak. The Fed has broadcast its intentions for one rate cut in 2024, with the CME FedWatch Tool showing current expectations for one in September. The presidential election later this year adds an element of uncertainty to trying to “time” an interest rate cut.
But, putting those two things aside, portfolio diversification and a long-term focus have been the ticket for ages. Some active participants may seek to look outside of tech and AI in Q3 to reduce portfolio volatility, be first in line to some dividend-paying blue chips, and perhaps find happiness in the beaten-up bonds/fixed-income products.
Diversification is the ticket to being a successful long-term investor; timing the market is very difficult, and diversification is much easier. Moreover, remaining focused on the long term allows an investor to avoid getting caught up in quickly changing narratives that could trigger emotional decisions.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
With fresh inflation data indicating a change in tune for the current narrative and the consumer backdrop, now is the perfect time to keep you updated on the latest developments.
Major U.S. equity indexes traded higher last week as investors interpreted soft June consumer pricing inflation data. Notably, the Dow Jones Industrial Average led the way among major indexes, closing the week just shy of its record high made back on May 20th. The Dow’s leadership came just as earnings season got underway.
Tallying the week, the S&P 500 rose by 0.86%, the Nasdaq 100 decreased by 0.30%, and the Dow Jones Industrial Average gained 1.59%.
Consumer Price Index: Monthly Decline
June consumer pricing actually fell on a monthly basis, with monthly CPI data showing a 0.1% monthly decrease from May, two ticks lower than the Dow Jones estimate for a 0.1% monthly increase. Great news for the interest rate cut case! Year-over-year, data showed a 3.0% increase, the lowest level in more than three years.
A 3.8% slide in gasoline pricing helped to tame the inflation reading, and even more good news was evident, as shelter and food costs were only 0.2% higher over a month ago. While still sticky, shelter inflation showed some signs of potential cooling, with the lowest monthly jump in three years encouraging interest rate-cutting hopeful bulls.
June Core CPI (which removes more volatile food and energy from the metric) also cooled more than expected, showing a yearly 3.3% gain, down from May’s 3.4% gain. On a monthly unrounded basis, it was the lowest reading since January 2021. It is safe to say that market bulls loved this aspect of things!
This reading came after the previous two readings for April and May came in below analyst estimates. It is unknown whether the trend will continue, of course, and what the market will do with this new information.
Producer Price Index: Warm
After the soft CPI print on Wednesday created some investment euphoria, Friday gave us June Producer Price Index (PPI) data, which ran hotter than estimates. Data showed wholesale pricing rose 0.2% in June, higher than the 0.1% Dow Jones estimate.
Looking at yearly data, wholesale data for June increased by 2.6%. So, while consumer pricing was lower, the wholesale pricing data was a bit warm. No celebrations just yet!
Services pricing contributed to the rise in overall producer pricing – showing a 0.6% monthly gain that accounted for around three-quarters of the overall wholesale pricing gain.
Rate Cut Aspirations
Hopes for Fed rate cuts are growing. And now, with solid CPI evidence backing such an action, probabilities of a September cut increased by the close of last week, showing a 92.4% chance of a Fed rate cut in September versus a 77.7% chance seven days prior (07/05), according to the CME FedWatch Tool.
Markets expect the Fed to leave rates unchanged at the upcoming July meeting on 07/31, with a 95.3% probability as of last week’s market close.
So, the softer-than-expected CPI data has boosted the probability of cuts last week, and recent softening consumer sentiment data surely factored into the increased probabilities.
Traders and investors will be paying attention to Federal Reserve Chair Jerome Powell’s speech on Monday and retail sales data on Tuesday for additional clues or confirmations on a softening economy and consumer.
Consumer Sentiment Dips
Last week, we got the latest from the University of Michigan’s Consumer Sentiment survey, which showed an eight-month-low in the reading.
Data showing economic metrics slowing/weakening is what the Fed and market bulls want. So, the softer the data is, the better for rate-cutting bulls — at least for now!
We will continue to monitor sentiment and the narratives that come along with it.
Small Caps Surge
Courtesy of CPI data, we saw the Russell 2000 Small Cap index rise steadily last week, with most of the gains coming right after the CPI release.
While lagging behind the major indexes year-to-date, this index seems to have shown value, with it adding 6.0% last week. Should interest rates fall, smaller firms that require more capital for operations could benefit.
Style Shift
Growth stocks have dominated over value stocks for an extended period.
However, last week, we saw value and large-cap dividend payers catch a bid, as investors shied away from tech, tech, tech.
All the while, the Dow led the way among the major indexes (Russell 2000 aside). It was a week of value plays and catch-up.
Let’s state the obvious:
Given these realities, a narrative shift away from the norm of the recent extended period could be in the cards – worthy food for thought.
The Week Ahead
This week is quieter news-wise, as markets will continue to digest last week’s inflation data while looking for clues from the Fed in Chair Powell’s comments on Monday.
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Overall, diversified, long-term equity investors were in command throughout June as the recent rally continued amid hopes for rate cuts. Signals of inflation easing were evident in various economic data reports scattered throughout the month.
Major Stock Indexes
The recent stock market rally has been centered around the technology and artificial intelligence (AI) theme. Tech & AI giant Nvidia has continued to propel broader averages, including the S&P 500 and Nasdaq 100, higher.
For the month of June, the S&P 500 added 3.47%, the Nasdaq 100 tacked on 6.18%, and the Dow Jones Industrial Average rose by 1.12%.
Payroll Whopper
The employment report for May, released in June, showed a surprising increase in job numbers, with 272,000 new jobs created, surpassing the estimated 190,000. This was a significant jump from the 175,000 jobs added in April.
There was a brief pause in the bullish market activity on the day of the data release (June 7th) ahead of the then-upcoming Federal Reserve meeting.
The recent job gains were primarily seen in the healthcare, government, and leisure and hospitality sectors, in line with ongoing trends. This trend signals a strong economy and raises questions about the timing of any potential interest rate cuts.
Supportive U.S. Inflation Data
June brought wonderful news for rate-cut-hopeful bulls, with inflation-busting optimism in full swing.
Consumer Price Index: As usual, markets were hyper-focused on the Consumer Price Index (CPI) data release. May’s month-over-month pricing showed no increase, and there was a 3.3% increase from a year ago, both below market expectations. The Core CPI, which excludes food and energy prices, rose by 0.2% compared to April, falling below the predicted 0.3%. The annual core CPI rate unexpectedly decreased to 3.4% from 3.6% in April, below the anticipated 3.5%. Stock bulls loved the news.
The S&P 500 and Nasdaq 100 reacted positively to the softer inflation data and traded near all-time highs. The Dow 30 didn’t follow suit, but their average dividend yield was around 1.99% as of June 29th.
Producer Price Index: With consumer pricing showing some signs of normalization in June, attention turned to producer pricing.
For May, the Producer Price Index (PPI) for final demand unexpectedly fell by 0.2% on a monthly basis, contrary to expectations of a 0.1% increase. This is positive news for those watching for potential interest rate cuts. Core PPI (which excludes food and energy) remained unchanged in May, falling below the expected increase. Year-over-year, Core PPI decreased to 2.3% in May, below the estimated 2.4%.
Fed Rate Decision & Outlook
As anticipated, the Fed decided to keep rates unchanged at its June policy meeting and hinted at taking a more aggressive stance on future Fed interest rate policy.
In terms of future rate cuts, the Fed has indicated that it is considering one rate cut in 2024.
“We believe that policy is restrictive. And we believe that if you maintain policy at a restrictive level, you will eventually see a real weakening in the economy,” Powell stated. “So, our stance has always been that, ever since we raised rates this much, we have always been open to the possibility of cuts at some point.”
“While we are not ruling out the possibility of rate hikes, no one considers it as the most likely scenario,” Powell added.
Given the softer inflation data and the Fed’s signal of a potential cut in 2024, it seems like a solid backdrop as we head into the second half of the year.
Treasury Yields Steady/Quiet in June
Treasury yields were slightly lower in June versus May, with the widely monitored 10-year Treasury Note Yield closing the month near 4.342% — about 17.3 basis points lower than May’s closing level of 4.515%.
Market participants are constantly calculating probabilities for Fed rate cuts, with the latest data to close June showing a 10.9% probability of a rate cut at the July 31st meeting and a 63.4% chance of a rate cut at the following meeting on September 18th.
The steady to slightly lower rates during June were welcome news for mortgage borrowing activity, with the average 30-year fixed mortgage closing the month of June close to the psychologically important 7% level.
The housing market seems to be in the midst of a shift in many locales as inventory has been growing.
The Takeaway
June featured a further continuation of the rally that started way back in November, which began with excitement surrounding AI, steadier interest rates, solid economic data, and a Fed that should be supportive going forward. Much of the narrative remains the same at the close of June.
The market expects rate cuts beginning in September, as the Fed wants to see further evidence that inflation has cooled sufficiently before cutting rates. Fed data implies one cut in 2024.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Last week was one of mostly steady gains on Wall Street, with fresh records set for the S&P 500 and Nasdaq. Additionally, the S&P 500 marked the longest streak without a 2% drop since the Great Recession.
Markets continue to digest the Fed’s pausing mode in earnest, feeling confident that inflation may have run its course in the eyes of the Fed.
Summarizing the major U.S. equity indices last week, we saw the S&P 500 settle at yet another weekly closing high, rising by 0.61%; the Nasdaq 100 rose by 0.21%; and the Dow Jones Industrial Average outperformed the preceding two indexes, and perhaps played a little catch-up, rising by 1.45%.
Housing Inventory Builds
Amid higher interest rates, the U.S. housing market faces some stiff headwinds, albeit with a delayed fuse, as inventory has climbed in recent weeks.
Periods of 7.00%-plus 30-year mortgage interest rates seem to be impacting consumer demand and the desire to transact.
The National Association of Realtors reported that existing homes declined in May by 0.7%, equating to a 2.8% decline from a year ago. Noteworthy.
Median prices, however, increased year-over-year by 5.8% to $419,300, the highest ever recorded.
Inventory data showed existing unsold homes grew substantially month-over-month by 6.7%, or the monthly equivalent of 3.7 months of supply.
Retail Sales Soften
For May, we saw retail sales rise less than expected, clocking in at a gain of 0.1% versus the Dow Jones estimate of a 0.2% gain.
Online retail sales increased by 0.8%, while bars and restaurants experienced a 0.4% decline. Furniture and home furnishing stores also saw a 1.1% drop.
Automobiles were the primary catalyst for the rise. In fact, excluding autos, sales declined 0.1%.
Energy in Conversation
While people may have bought cars and trucks in May, it seems that consumers are driving less. Gasoline sales declined for the month, historically viewed as the beginning of the summer peak driving season.
U.S. gasoline station sales are at a current level of $53.58 billion, down from $54.80 billion last month and up from $52.76 billion one year ago. So, gasoline sales were down on a monthly basis, yet higher year over year.
At the same time, crude oil rallied last week to reach seven-week highs, as U.S crude and gasoline inventories fell, with supply concerns in focus.
According to AAA, gasoline prices in the United States were at a national average of $3.447 per gallon as of 06/23/24. However, prices in the West Coast and Hawaii were as high as $4.81 per gallon as of the same date.
Fed’s Favorite on Deck
This Friday’s Personal Consumption Expenditures (PCE) will be the big data release this week, as traders and money managers look for reinforcement of the recent lower-than-expected inflation data prints in CPI & PPI.
PCE data expectations heading into this week are for no change in May on a month-over-month basis and for a minimal 0.1% gain in core PCE, which excludes food and energy.
The Takeaway
Major U.S. equity market indexes have continued their solid ascent in recent weeks, buoyed by recent inflation readings and expectations for a Fed that is satisfied with the progress on inflation.
As more trading days go by, the outlook for lower interest rates should increase. Let’s remember that markets love to look ahead to the next big thing.
While CPI data showed some cooling in May, it is just one data release, and markets are looking for further confirmation of an inflation-cooling trend with this week’s PCE data release.
CNN’s Fear and Greed Index shows fear in the marketplace, which could indicate many folks have missed this recent rally. Staying invested for the long run is the surefire way to avoid emotionally charged financial decisions.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
With CPI and the Fed meeting moving markets last week, it is a good time to keep you informed via a quick update.
As expected, the Fed kept interest rates unchanged last week at its June policy meeting. The outlook from the Fed via Chair Powell’s commentary during the Q&A session indicated one rate cut to come this year–and markets didn’t mind that. CPI, however, was the main storyline of the week, with data showing prices decelerating overall.
Markets experienced CPI-fueled gains, as the S&P 500 rose by 1.58%, the Nasdaq 100 tacked on 3.47%, and the Dow Jones Industrial Average decreased by 0.54% for the week.
Consumer Price Index
Markets were all about CPI on the morning of the June meeting, with data showing no increase in pricing for May, and a 3.3% increase in consumer prices from a year ago; both data points 0.1 percentage points below market expectations.
The Core Consumer Price Index (Core CPI), which excludes the impact of volatile food and energy prices, increased by 0.2% compared to April levels. This smaller-than-expected rise was lower than the predicted 0.3% rise. The annual core CPI inflation rate unexpectedly decreased to 3.4% from 3.6% in April, falling below the anticipated 3.5%. Core CPI reached a 40-year high of 6.6% in September 2022.
The verdict? The S&P 500 and Nasdaq 100 loved the softer inflation data and traded near all-time highs. Industrials via the Dow 30 didn’t quite follow suit, but let’s not forget the average dividend yield of these heavyweight blue chips near 2.01% as of June 15th.
Fed: Rates Unchanged
As expected, the Fed left rates unchanged at last week’s June policy meeting, also striking a hawkish-sounding tone for the future direction of Fed interest rate policy.
Regarding rate cut direction, we learned that the Fed is looking for one rate cut in 2024.
“The question of whether it’s sufficiently restrictive is going to be one we know over time,” Powell said. “But I think for the reasons I talked about at the last press conference and other places, I think the evidence is pretty clear that policy is restrictive and is having, you know, the effects that we would hope for.”
Softer inflation data, a Fed that is telegraphing one potential cut in 2024, and S&P 500 all-time-highs. What’s not to like?
Consumer Confidence Dips
University of Michigan’s monthly Preliminary Consumer Confidence data showed a wilting consumer in June, with sentiment reaching a 7-month low.
Data showed a 65.6 reading; below a forecast of 72.1; indicating a softer consumer.
For context, the Michigan Consumer Sentiment Index is a monthly survey that measures consumer confidence levels in the U.S. regarding the economy, personal finances, business conditions, and buying conditions. The survey is conducted by the University of Michigan. Each month, two reports are released: a preliminary report in the middle of the month and a final report at the end of the month.
Keeping At It
Investors who remained disciplined during a pandemic, inflation, and higher interest rates are now reaping the rewards.
Looking at the present backdrop, last week’s softer-than-expected inflation data in both CPI and PPI is very encouraging in the inflation fight–and the market response is obvious, with both the S&P 500 and Nasdaq 100 closing last week at weekly all-time-closing highs.
After last week’s economic data, this week may be tame; Retail Sales will be in the spotlight to further gauge the consumer.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock market indexes traded to the upside last week, with the Nasdaq and S&P 500 both trading at record highs.
Overall, the S&P 500 rose by 1.32%, the Nasdaq 100 increased by 2.50%, and the Dow Jones Industrial Average was higher by 0.29%.
The AI narrative showed renewed strength last week with NVIDIA leading the way, providing the backdrop for tech’s dominance in the indexes.
Payrolls Shock to Upside
To the dismay of Fed rate cut bulls, Friday’s May jobs data release showed gains of 272,000 jobs versus Dow Jones estimates for 190,000. This figure was also much higher than April’s gains of 175,000.
The recent job gains were primarily focused on healthcare, government, and leisure and hospitality, in line with current trends. With the Fed meeting in play this week, bulls took a bit of a breather after this on Friday, but the S&P 500 still closed at a weekly all-time high.
The jobs data provides a fresh signal that the economy could be running too hot to cut interest rates soon. However, we will get fresh Consumer Price Index (CPI) data on Wednesday morning ahead of the Fed later in the day.
Fed Decision Imminent
On Wednesday, we get the latest broadcast from the Federal Open Market Committee (FOMC) on the future direction of monetary policy.
Last week showed some developments internationally regarding central bank interest rates. Despite lingering inflationary pressures, the European Central Bank (ECB) cut rates by 0.25% and the Bank of Canada (BoC) also cut rates by 0.25%.
Could the Fed follow suit? As of last Friday’s market close, there was a 97.8% probability of no change in interest rates and a 2.2% chance of a rate cut, according to the CME FedWatch Tool. Friday’s jobs data also makes that less likely.
That said, we’ll see what the Fed has in store for Wednesday along with the telegraphing for future policy.
A Busy Wednesday in a Full Week
On Fed Day (Wednesday), we will get CPI in the morning (8:30 AM) and then the Fed rate decision and statement (2:00 PM), and the subsequent Q&A session. If you like catalysts, Wednesday is surely your day.
After the dust settles on Wednesday, the Producer Price Index (PPI) data is on deck for Thursday morning, along with weekly unemployment claims.
And to finish this week, a fresh check on the state of the consumer arrives via preliminary University of Michigan Consumer Sentiment data. The previous report showed the consumer becoming more cautious — we will see what this report has in store for us.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Stock index investors were in command throughout May as the major stock indexes resumed their rallies after consolidating in April.
With the major U.S. equity market indexes resuming runs that began back in November, now is the perfect time to inform you about the latest developments over the course of last month. Below is the latest.
S&P 500: Rally Resumption
The broadest measure of the U.S. economy clawed back all of the consolidation from April and closed at a fresh monthly closing high in May, marking six out of the last seven months in the green. Overall, the S&P 500 had its best May since 2009. Long-term investors will take that to the bank!
For the month of May, the S&P 500 added 4.80%, the Nasdaq 100 tacked on 6.28%, and the Dow Jones Industrial Average was higher by 2.30%.
Tech Leads S&P 500
Tech led in May, with Microsoft, Apple, Nvidia, Alphabet, Amazon, and Meta accounting for 76% of the index’s total gains of the month.
Specific strength was seen in information technology towards the end of the month. Overall, the information technology sector showed investors a very solid earnings season, as earnings growth was the third highest among the 11 S&P 500 sectors.
The S&P 500 information technology sector is led by chip giant Nvidia Corp, Broadcom, Fair Isaac and Company, Super Micro Computer, and other tech powerhouses.
Fed Meeting, Reaction, & Outlook
The Federal Reserve kept the federal funds rate unchanged at 5.25% – 5.50% during the May 1st meeting, as expected.
The Fed statement said, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
As traders and money managers digested the May 1st mood of the Fed, the S&P 500 was slightly lower at the day’s close. But markets like catalysts, and the Fed meeting turned out to be the low for the S&P 500 for the month.
Powell also hinted that a rate hike would not be the next move from the central bank. Markets liked hearing that! But what would the tone of the Fed and investors be as the month progressed?
Earnings Surprises
After the Fed meeting catalyzed a May 1st low in the S&P 500 for the month, attention shifted back to Q1 earnings season — and for good reason.
As of May 31st, with 98% of S&P 500 companies reporting earnings results 78% of S&P 500 companies have reported a positive earnings per share (EPS) surprise, and 61% of S&P 500 companies have reported a positive revenue surprise.
First quarter S&P 500 earnings growth was heavily concentrated among five names: NVIDIA, Alphabet, Amazon.com, Meta Platforms, and Microsoft.
The solid Q1 earnings season provided a boost to the overall backdrop in equities as markets battle continued inflation and elevated interest rates.
Consumer Moods
According to the University of Michigan Surveys of Consumers, inflation concerns have caught up with consumers.
The most recent survey indicated that consumer sentiment dropped by about 13% in May compared to April, following three months of minimal change.
The result may have been fully expected by many, as inflation continues to be sticky and affects Americans.
But, later in the month, the next set of consumer tracking data, showing consumer confidence, told a different story. The data, closely watched after the previous sour consumer number, showed consumer confidence improving for the first time in four months.
The index increased to 102.0 this month from April’s upwardly revised 97.5, surpassing the forecast of 96.0.
It seems we are seeing some mixed messaging on the consumer.
Mixed Inflation Data, Markets Cheer
Consumer Price Index (CPI): Speaking of the consumer, all eyes were peeled on the heavily anticipated monthly CPI data.
Consumer inflation in April eased, with the monthly CPI data showing a 0.3% increase from March, slightly lower than the 0.4% Dow Jones estimate. Year-over-year, data revealed a 3.4% increase, in line with estimates.
Core CPI (which excludes more volatile food and energy prices) was very encouraging, showing a year-over-year 3.6% increase, the lowest reading since April 2021. It’s safe to say that market bulls loved this aspect of the report!
The markets responded positively to the consumer inflation data, with the S&P 500 reaching a record-high close on the same day. What more could we ask for? Treasury yields also traded lower throughout the day after the data release.
Producer Price Index (PPI): The day before CPI data was released, April PPI data showed wholesale pricing rose by 0.5% in April, surpassing the 0.2% estimate from Dow Jones. Yearly data revealed a 2.2% increase, marking the largest gain in a year.
Similar to CPI, the rise in overall producer pricing was influenced by services pricing, which saw a 0.6% monthly gain and accounted for about three-quarters of the overall wholesale pricing increase.
Core PPI, which excludes volatile food and energy, also rose by 0.5%, exceeding the estimated 0.2% increase.
Following the data release, stock index futures remained nearly flat, causing some uneasiness in anticipation of the next day’s CPI data. However, stocks eventually rose on the day, setting the stage for the CPI report the following day, which ultimately met the expectations of equity market bulls.
Personal Consumption Expenditures (PCE): Rounding out May’s inflation data releases, the freshest piece of inflation data was delivered on the final trading day of May in the form of Core PCE.
The Fed’s favorite inflation gauge cooled in April, with Core Personal Consumption Expenditures showing a rise of 0.2% in April, versus estimates of 0.3%. This is what folks wanted to see. The S&P 500 rallied heavily towards the end of the final trading day of May.
Strong Labor Market Data
The April employment data, released on May 3rd, showed an increase of 175,000 payrolls for the month, falling short of the estimated 240,000. Surprisingly, this was seen as good news, as the first nonfarm payrolls “miss” since November 2023 could strengthen the case for a potential cut in interest rates.
This “bad news is good news” report gave stock market bulls reasons to be optimistic, as there was hope for softer upcoming inflation data. Later in the month, some of those hopes were realized.
The unemployment rate increased slightly to 3.9% from 3.8% in March.
Fed & the Future
The latest data to close May showed a 99.9% probability of the Fed leaving rates unchanged at the June 12th meeting and a 14.5% chance of a rate cut at the following meeting on July 31st.
The highest probability for a first rate cut surrounds the September 18th meeting, with a 53.9% chance of a rate cut at the end of May.
The Takeaway
May featured a resumption of the rally for major stock indexes, solid corporate earnings overall, slightly lower interest rates, varying economic data, and a Fed that should be supportive going forward as long as inflation cooperates.
As June began, the S&P 500 was working off a monster rally on the last day of the month. Was it month-end books squaring or perhaps a sign of what is to come in June? We will find out as the month unfolds.
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Major U.S. equity indexes traded higher last week as investors interpreted April wholesale and consumer pricing inflation data. Notably, the Nasdaq traded to a record high on Tuesday, while the Dow and S&P 500 made fresh highs the next day, courtesy of Consumer Price Index (CPI) data.
Overall, for the week, the S&P 500 rose by 1.54%, the Nasdaq 100 increased by 2.12%, and the Dow Jones Industrial Average gained 0.34%.
With fresh inflation data and record highs in major equity indexes, it is the perfect time to share an overview of the latest developments.
Inflation Data Mixed, Well Received
Consumer Price Index: Consumer inflation eased in April, with monthly CPI data showing a 0.3% monthly increase from March, a tick lower than the 0.4% Dow Jones estimate. Year-over-year, data showed a 3.4% increase, in line with estimates.
Services, notably transportation and “shelter services,” were drivers of higher prices. Shelter costs were up 5.5% from a year ago and continue to show stubbornness. Electricity prices showed a 5.1% increase year-over-year — just in time for the summer cooling season.
Core CPI (which removes volatile food and energy from the metric) was very encouraging, showing a yearly 3.6% gain. This was the lowest reading since April 2021.
Markets reacted positively to the consumer inflation data, with the S&P 500 posting a record-high close on the same day. What more could we ask for here? Treasury yields also traded lower throughout the day after the data release.
The verdict? Inflation is still sticky; there is no doubt about it. However, last week brought a welcome data print that the markets wanted to see.
Producer Price Index: Before the bullish CPI print on Wednesday, Tuesday gave us the April Producer Price Index (PPI) that ran quite hot, with data showing wholesale pricing rising 0.5% in April. This reading was higher than the 0.2% Dow Jones estimate. Looking at yearly data, wholesale data for April increased by 2.2% – the biggest gain in a year. So, the wholesale pricing data was hot.
Akin to CPI, services pricing contributed to the overall rise, showing a 0.6% monthly gain that accounted for around three-quarters of the overall wholesale pricing gain.
Core PPI, which excludes volatile food and energy, rose 0.5% versus the estimate for a 0.2% increase.
Stock index futures were nearly flat following the data release, potentially creating some jitters in anticipation of the next day’s CPI data, but stocks shook off the jitters and rose for the day. The table was set for CPI on the next day, and bulls got what they wanted.
Rate Cut Aspirations
Hopes for Fed rate cuts are alive and well, with the probabilities increasing last week, showing a 29.6% chance of a Fed rate cut in July, versus a 25.4% chance seven days prior, according to the CME FedWatch Tool.
For the September meeting, last week closed with a 64.2% chance of a cut in September versus a 61.2% chance of such occurrence seven days prior, according to the CME FedWatch Tool.
So, the softer-than-expected CPI data boosted the probability of cuts last week, and recent softening consumer sentiment data surely factored into the increased probabilities.
Traders and investors will be paying attention to this week’s Federal Open Market Committee meeting minutes for clues about the Fed’s mood.
Bad News Can Be Good News
Markets are dynamic and fascinating! Sometimes, bad news is bad news. But right now, it feels like we are in a “bad news is good news” market environment when it comes to economic data.
The Fed and market bulls want supportive economic data showing economic metrics slowing/weakening. We will continue to monitor sentiment and the associated narratives.
The Takeaway
All-time highs in the major stock averages may seem counterintuitive given the headwinds that exist in the world. But the trend remains upward as AI continues to fuel investor demand with rate-cut hopes providing extended optimism.
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Last week, as earnings season started to wind down, major U.S. stock indexes traded on the quiet side, with the overall trend being higher.
Tallying the week, the S&P 500 rose by 1.85%, the Nasdaq 100 increased by 1.51%, and the Dow Jones Industrial Average saw an uptick of 2.16%.
Three in A Row
Major U.S. stock indexes made it three weeks in a row of gains, with the S&P 500, Nasdaq, and Dow all higher. As of Friday’s market close, major U.S. stock indexes were slightly lower than their record-high levels posted in early April.
Volatility Declines
After some recent investor anxiety in April, the CBOE Volatility Index fell by nearly 7% last week, reaching lows not seen since March.
The decline indicates that investor anxiety has eased from higher levels when the Israel/Iran situation was making headlines.
Consumer Sentiment Softens
According to the monthly University of Michigan’s Surveys of Consumers, inflation fears have spooked consumers.
The monthly survey showed consumer sentiment declined about 13% in May from April levels following three months of little change.
“While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions,” said Joanne Hsu, the survey’s director. “They expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead.”
Many have been surprised that such a change in sentiment has not happened earlier, as the inflationary toll on middle-class Americans has been steady for a prolonged period. Could the consumer be the chink in the armor of this economy, finally?
S&P 500 Earnings
As of May 10th, with 92% of S&P 500 companies reporting actual results, blended Q1 year-over-year earnings growth (which combines actual and estimated results) was 5.4% for the S&P 500.
Should 5.4% be the actual growth rate for Q1 once all S&P 500 earnings are totaled, it would mark the highest year-over-year earnings growth rate for the S&P 500 since the second quarter of 2022. Not too shabby!
First quarter S&P 500 earnings growth was heavily concentrated among five names: NVIDIA, Alphabet, Amazon.com, Meta Platforms, and Microsoft.
Economic Data Incoming
It’s a data-heavy week, with the Producer Price Index release on Tuesday at 8:30 a.m. and the Consumer Price Index release at 8:30 a.m. on Wednesday. Additionally, retail sales data will be released on Wednesday, which could garner more attention than usual after the dip in consumer sentiment last week.
The Takeaway
Last week was one of those “smooth sailing” weeks that are quite enjoyable as a long-term investor, as time in the market takes care of itself versus ”timing” the market.
Time in markets is what matters. It is the discipline and consistency of a long-term investor that allows weeks like last week to be enjoyed to their fullest!
Market narratives are dynamic, and we are now seeing a healthier narrative with supportive earnings overall for Q1 2024, yet so much hinges upon upcoming inflation data. Markets want rate cuts, and as of last week’s market close, it looks like July or September is expected by rate cut bulls. Of course, that is subject to change.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
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