U.S. stock market indexes were already digesting warmer inflation data as last week began, and rate cut probabilities thinned further as the Israeli retaliatory strike took place.
Overall, the S&P 500 declined by 3.05%, the Nasdaq 100 fell by 5.36%, and the Dow Jones Industrial Average was a smidge higher — essentially unchanged — ending the week higher by 0.01%. The Dow Jones’ performance can be attributed to earnings-based strength and value stock performance in the 30-stock index.
U.S Stocks / Major Earnings
Stocks traded lower overall in a mostly orderly fashion last week, with war tensions adding to inflationary pressures and shifting Fed interest policy expectations.
Earnings strength from American Express helped to cushion the blow last week, even as Travelers’ results earlier in the week were less than desirable.
The mood last week was as follows: If earnings were good, stocks barely moved up. But if an entity showed weak numbers or guidance — boy, did the market punish certain individual stocks. This type of earnings volatility could create opportunities in this fresh week.
Growth Pullback
Have you ever wondered what market watchers mean when they say “growth stocks” or “value stocks?” Here’s a good overview for you.
Last week, value stocks (iShares S&P 500 Value ETF) outperformed growth (iShares S&P 500 Growth ETF) by a substantial margin. This indicates a more risk-averse investor in light of the macroeconomic backdrop.
Value stocks, although not as alluring as their growth counterparts, are essential for diversified portfolios. Investors will continue to look to find opportunities at current valuations.
Israel Retaliation
Late Thursday evening, Israel carried out a retaliatory strike against Iran in what was being described as a “limited” attack. The counterattack comes after Iran’s failed attack on Israel.
The strike caused volatility in the futures markets Thursday night, with the E-mini June S&P 500 futures losing around 80 points at its low point (near 4963.75 around 10:15 PM), then recovering those losses overnight and into the morning at the start of the New York trading session. To end the day, about half of those initial losses were recovered, with the June E-mini S&P 500 futures settling near 5003.75.
So, volatility erupted overnight on the Israeli strike last week, but markets digested the strike rather well and in a mostly orderly fashion on Friday, with the cash stock market session staying above the overnight lows made Thursday night in the S&P 500 futures.
Treasury Yields Rise
Marking the third consecutive week of rises, the 10-year U.S. Treasury Yield made highs not seen since last November last week.
The rising Treasury yields coincided with continued dwindling expectations of Federal Reserve (Fed) rate cuts. (More on the causes of that below). According to the CME FedWatch Tool, end-of-last-week probabilities showed a 16.6% chance of a cut in June, a 40.7% of a cut in July, and a 64.4% chance of a cut in September.
June probabilities fell sharply week-over-week, while July and September rate cut probabilities declined at a smaller rate.
Fed Comments
Comments from Federal Reserve Chair Jerome Powell’s fireside chat at the Wilson Center included the following: “Recent data have clearly not given us greater confidence” that inflation is coming fully under control and “instead indicate that it’s likely to take longer than expected to achieve that confidence.”
In addition, other Fed officials made similar comments last week, including Atlanta Fed’s Raphael Bostic.
S&P 500 Resilience: A Reminder in Troubling Times
While others may panic, let’s be pragmatic. The S&P 500 is the broadest measure of the U.S. economy, and it was only down 3.05% last week while two countries launched missiles at each other. That’s 3%, not 10%. The point is that the broadest measure of the U.S. economy managed these events in an impressive and orderly fashion thus far.
Should the selloff continue, technicians and traders will undoubtedly start to look at the 200-day moving average in the S&P 500, which could potentially be a place where some buyers emerge.
Should the Middle East remain quiet over the weekend, markets could begin to normalize next week — it is just too early to tell what could happen.
Big Tech Earnings This Week
This week, the rubber will meet the road, as the most anticipated earnings results of the quarter will drop.
The development of generative AI will get a fresh update this week, with Microsoft, Amazon Neta, and Google all reporting quarterly results.
Bulls (market participants who believe the market is on the upswing) are optimistic for big numbers and outlooks on the AI front, while bears (market participants who believe price drops are coming) and algorithms will be looking to punish companies that missed based on last week’s events.
So, it will be big tech earnings vs. the macroeconomic headwinds this week — a battle royale!
Reflecting and Looking Ahead
Investors are dealing with higher interest rates and sticky inflation, and now the new unknown has been introduced: the evolving Middle East situation. It’s anybody’s guess if other unknowns could enter the market. China/Taiwan issues come to mind.
It has been a long time since a substantial pullback in the broader U.S. equity indexes, and so far, the S&P 500 is higher by above 4% year-to-date at the time of writing, even after last week’s 3.05% selloff.
This week brings us plenty of catalysts: big tech earnings, other earnings, Core PCE (the Fed’s “preferred” inflation metric), and GDP data. All the while markets will continue to digest the most recent inflation data and the Middle East events. This week should be an action-packed one as investors look for opportunities.
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Last week was an action-packed one in the U.S. financial markets. There was plenty of emotion and news moving markets, even before the Iranian strike on Israel occurred.
As a result, there are questions from a wide spectrum of investors, so here is a special update on last week, as this week is sure to bring its own market-moving headlines.
U.S. Stock Indexes
After making record highs at the end of March, the S&P 500 and the Dow continued their April retreat for the second consecutive week. Major U.S. equity indexes traded lower for the week, with volatility returning to markets as investors interpreted hotter-than-expected consumer pricing inflation data. Adding fuel to the fire was uncertainty surrounding Israel & Iran.
For the week ending 04/12/24, the S&P 500 declined by 1.56%, the Nasdaq 100 decreased by 0.58%, and the Dow Jones Industrial Average fell by 2.37%.
Iran Attacks Israel
Iran attacked Israel on Saturday, firing drones and missiles directly from Iranian territory — an unprecedented event. The majority of the incoming missiles and drones were shot down by Israel’s sophisticated defense system, with the U.S. and other nations assisting.
Now, the world awaits Israel’s response, which is unknown at the time of writing. Markets will be digesting the weekend’s events on top of the higher inflation data released last week during trading this week.
March Inflation Data
Hot CPI on Wednesday: March Consumer Price Index (CPI) data came in hotter than expected last week, showing a 0.4% month-over-month increase and a 3.5% increase versus one year ago. Economists surveyed by Dow Jones had expected a 0.3% increase and a year-over-year level of 3.4%.
The prior month’s CPI reading was 3.2% year-over-year, so a jump to 3.5% was significant. This development sent the broader markets lower last Wednesday, with the S&P 500 losing about 1% and the Dow shedding 422 points last Wednesday.
The verdict? CPI = hot. This most recent release marks three consecutive months of monthly 0.4% increases in CPI.
Some highlights from the report showed skyrocketing car insurance costs, with car insurance rising by 2.7% month-over-month and 22.2% year-over-year. Shelter was also up 5.7% from one year ago. Transportation prices also saw rises. Let’s state the obvious: everything costs “a lot.”
Check out this handy chart for the latest inflation data on various goods and services.
Mixed PPI on Thursday: Markets caught a reprieve the day after CPI, with Thursday’s headline March Producer Price Index (PPI) data coming in below expectations on a monthly basis. Wholesale pricing increased by 0.2% month-over-month versus 0.3% expected. This came after February data showed a white-hot 0.6% monthly increase in PPI.
Annualized, however, March PPI rose by 2.1%, the highest level since April 2023.
Market action on Thursday was a bit bewildering, as the S&P 500 clawed back around 80% of Wednesday’s CPI data losses, closing up 0.8% on the day.
The PPI data was okay, but the bounce seemed to be a bit overzealous. The Nasdaq Composite made a fresh record high as buyers came into a handful of tech stocks, with Amazon touching fresh all-time highs on Thursday.
There are plenty of ways to slice and dice inflation data: exclude shelter, exclude autos, exclude this and that. The bottom line that many analysts will view is three months of firming inflation data overall.
Moderate Volatility Last Week
Volatility was not massive last week — at least not yet — as the declines were orderly on the rather muted side historically.
The S&P 500 moving around 1% lower off of hot CPI and then around 1.46% on Friday in anticipation of Middle East unknowns is actually rather tame (i.e., not 3%+ down moves as can happen during sharp corrections). Some folks have been calling these pullbacks “nano pullbacks” or “micro selloffs.”
The VIX, or “Fear Index,” moved higher last week but closed off its Friday highs, tacking on 7.99% for the week to close at 17.31. It had been as high as 19.20 earlier in Friday’s session and was still well off the highs we saw during March 2020 (near 85.00).
Fedspeak
Fed officials offered varying comments on policy last week, indicating a divided Fed.
Fed commentary was so frequent last week, that it was challenging to keep up with each day. The overall message, however, is that rate cuts will likely be pushed out, and that is logical given persistent inflation.
Eleven Fed member speeches are scheduled for this week from Monday to Thursday alone! One of the speeches will feature Federal Reserve Chair Jerome Powell and Bank of Canada Governor Tiff Macklem, who will speak at The Wilson Center, for a fireside chat on U.S.-Canada monetary policy.
Spending Bill Incoming?
Additional aid packages for Ukraine had been already in talks again, and now a spending package for Israel is almost certainly in the cards.
It is unclear whether the package will be a standalone package for Israel or jointly include more Ukraine funding.
Dictate What Happens
Volatility comes and goes in markets, and early (small) signs of it have shown up over the last seven trading sessions. Let’s remember that the S&P 500 was 24.23% higher in 2023 and is currently 7.41% higher so far this year! Corrections or pullbacks are bound to happen.
Nobody knows what this week will bring yet, but volatility could persist from last week’s levels, given the Iran/Israel developments and persistent CPI data here in the U.S.
As a long-term investor, it is wise to be thinking ahead and dictate what happens, instead of reacting to it. So, what can you do as a long-term investor? Plan and execute.
Planning and execution will vary depending on one’s investment objectives and time horizons, among other factors. In many cases, no action other than sticking to the existing plan will be the right move.
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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 indexes exhibited some volatility last week due to geopolitics and a Federal Open Market Committee (FOMC) member comment last Thursday. Hotter-than-expected headline labor market data on Friday propelled a partial reversal of Thursday’s lower close, but major-market equity indexes still closed lower for the week overall.
Tallying last week, the S&P 500 fell by 0.95%, the Nasdaq 100 declined by 0.80%, and the Dow Jones Industrial Average decreased by 2.27%.
Geopolitics, Fed
Last Thursday, on a call with Israeli Prime Minister Benjamin Netanyahu, President Biden pressured Israel to open more aid routes to Gaza and indicated that the U.S. would change its policy if Israel didn’t take steps to prevent civilian harm. The phone call added uncertainty to the overall macroeconomic backdrop.
At nearly the same time last Thursday, Neil Kashkari, President and CEO of the Federal Reserve Bank of Minneapolis and nonvoting FOMC member, commented on the possibility of no rate cuts this year in a LinkedIn live interview with Pensions and Investments magazine.
This “Thursday Double Whammy” wasn’t received with joy by the major U.S. stock market indexes, as they dropped on Thursday.
Headline Payrolls Strong
Top-line job gains for March were solid yet again, as the number showed 303,000 jobs created, massively beating the Dow Jones estimates for 200,000.
But hold the phone. The monthly jobs data is a 39-page report. Under the hood, we can see there is reason for scrutiny.
Under the Hood of Labor Market Data
Notably, part-time jobs spiked by 525,000 in March versus a 107,000 increase in February. This could mean that some jobs are being downgraded from full-time roles to part-time and/or many Americans are taking additional “side work” or gig jobs to absorb the persistently high cost of living.
Data shows that full-time employment has gotten substantially lower over the last 12 months, a reinforcement that our work environments have changed (remote work, multiple part-time gigs, etc.).
Strength in the monthly jobs report was shown in increases of healthcare jobs (72,000), government jobs (71,0000), and leisure/hospitality (49,000). Recently, these labor market segments have been leading in job creation.
Unemployment declined to 3.8% from 3.9% last month.
Market Reaction
Like most major U.S. economic releases, the monthly jobs number drops at 8:30 a.m. While the cash stock market is not yet open, futures markets are trading at this time.
Initially, and throughout most of last Friday’s session, major U.S. stock indexes rose moderately on the bullish-looking jobs number.
If this report had been released six months ago, major market indexes probably would have risen more on the monster 303,000 jobs print. However, it seemed that Thursday’s commentary from Kashkari and Middle Eastern tensions were still on the market’s mind on Friday.
Ten-Year Yields Rise
Ten-year note yields rose last week to begin the quarter, tacking on just over 17 basis points week-over-week, settling near 4.379% last Friday, the highest weekly closing level since November.
The benchmark 10-year yield declined last Thursday, while major U.S. equity indexes sold off on geopolitical tensions and Fed member Kashkari’s commentary. But Friday, bonds were sold (with yields up) on the heels of the payrolls report.
Commodities
Raw commodity prices have been rising lately overall as consumers continue to contend with high prices of everything.
Energy: The energy sector found buyers in the first quarter. The second quarter began the same way, with the price of West Texas Intermediate (WTO) Crude Oil for May delivery climbing and settling near $86.91 per barrel last week.
Tensions in the Middle East are quite supportive of firm oil pricing, with some analysts looking for $90 WTI Crude in the near future.
It’s the spring driving season, and we can look for higher prices at the pump through Memorial Day. The average price for a gallon of regular unleaded gasoline nationwide was $3.598 as of Monday, April 8.
Gold: Zooming to all-time highs, gold has been on the rise for many reasons, due to the current time of geopolitical tensions and the “sound money” play amidst inflation uncertainty.
It’s not just rotisserie chickens! Costco has been in the news in recent weeks, with members buying up gold bars and silver coins.
The challenge with buying physical gold and silver is the “premium,” or the dollars above the spot price for the metal. For example, if spot gold is $2,300, a one-ounce gold bar may retail for $2,400. So, investors need the market to move their way by 4% to 5% to achieve breakeven. Liquidity is also not as simple as buying or selling an ETF.
Spot gold was higher by approximately 5% last week and closed the week near $2,330 per troy ounce.
Food & Agriculture: Cocoa prices have risen enormously in recent weeks and months. Other agricultural prices have risen, too.
One way to monitor or invest in agriculture outside of futures contracts is via the Invesco DB Agriculture Fund (DBA) ETF. This ETF holds cocoa, coffee, soybeans, corn, wheat, sugar, and more.
DBA tacked on 1.13% last week, not the best news for folks looking for lower prices at the grocery store.
Nascent Volatility?
Market volatility has been notably suppressed since last October. Since then, we have experienced a steady rise in the S&P 500 and an overall decline in Treasury yields.
Last week gave a hint of market volatility. The lately-forgotten-about Volatility Index got a bump last Thursday, resulting in the highest weekly close since October. S&P 500 options volatility remains at subdued levels (sub-20) as of Friday’s market close.
Narratives Change, Long-Term Investors Remain Steadfast
The first week of the second quarter indeed felt different from the overall market environment that we saw during and through the end of the first quarter.
This new narrative is still not completely clear. But here is what we know: it’s an election year, inflation is persistent, and the Fed’s next move is an unknown. In addition, geopolitical tensions may escalate in the coming days.
What will the Fed do next? What about interest rates and inflation?
For clues this week, attention turns to March Consumer Price Index (CPI) inflation data on Wednesday. The most recent CPI report for February showed a 3.2% year-over-year increase.
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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 March as the recent rally continued and showed signs of broadening to other sectors. As a bonus, the recent stock index rally was fueled further by a Federal Reserve (Fed) that sounded dovish, or accommodating, on interest rate policy.
With the major U.S. equity market indexes continuing their runs since November, now is the perfect time to inform you about the latest developments over the course of the last month.
Major Stock Indexes
The recent stock market rally started to broaden out in recent days — great news for long-term investors. Strength was seen outside of megacap tech stocks, with S&P 500 sectors like energy and perhaps underloved financials, utilities, and materials posting solid gains in March as consumer discretionary stocks lagged.
Market bulls were also cheering the prospects of a more accommodating and rate-cutting Fed later this year, and they were bolstered by Federal Reserve Chair Jerome Powell’s comments on monetary policy, further catalyzing gains for the month.
For the month of March, the S&P 500 added 3.10%, the Nasdaq 100 tacked on 1.17%, and the Dow Jones Industrial Average rose by 2.08%.
Fed Rate Decision & Outlook
The Fed left interest rates unchanged at its March policy meeting, in line with market expectations.
More important than the rate decision itself: the Fed’s tone on the future direction of monetary policy, inflation, and interest rates. Powell’s post-meeting commentary was deemed dovish by the market at large.
Market reaction to the Fed commentary during the post-meeting press conference was bullish and was on full display, as all three major stock indices jumped to record-high levels.
The Fed will continue to monitor inflation readings to ensure they move towards the 2% Fed target as the markets digest recent warmer-than-expected inflation readings (PPI & CPI).
According to the Fed’s Summary of Economic Projections (SEP), three 25-basis point rate cuts are now expected for 2024.
Warmer U.S. Inflation Readings
The overall trend for inflation saw some heating up in March, as both consumer and wholesale pricing came in a bit hot.
Consumer Price Index: The most recent CPI data released in March (February data) showed inflation running hotter than analyst expectations. The report revealed a 0.4% increase in monthly CPI for February and a 3.2% increase compared to the same period last year.
Dow Jones estimates had predicted a 0.4% monthly gain in February and a 3.1% year-over-year increase.
Prices of goods and services are still elevated — we don’t need government data to let us know. But most analysts are looking for the overall inflation-cooling trend to continue.
Producer Price Index
Wholesale pricing rose 0.6% in February versus Dow Jones economist estimates of 0.3%.
That’s double the forecast and gave market participants food for thought. Year over year, prices increased by 1.6%, the biggest move since September 2023.
Core PPI, which excludes food and energy, increased by 0.3% for the month, compared to the estimated 0.2% rise.
Stock indexes reacted to the downside for a day or two upon the data release but found their footing quickly.
Personal Consumption Expenditures (PCE): The freshest piece of inflation data for March came out on Good Friday, with the U.S. markets closed in observance of Good Friday.
Data showed pricing rising in line with expectations, with prices rising 2.8% annually and 0.3% versus one month ago. This data should keep expectations for a Fed rate cut in June in play.
Global Inflation Easing Signs
So, why doesn’t the stock market get spooked when inflation data comes out hot like it did in March? Well, that is open to interpretation.
We do know that inflation metrics are lagging indicators; they measure the previous month, and markets are always looking ahead.
Looking at Europe, we see that their inflation metrics have recently fallen from an annual rate of 10.6% at its peak to just 2.6% in a recent reading. Compared to the U.S.’s peak year-over-year inflation of 9.1% (June 2022), the eurozone has experienced even more inflation volatility.
Canada’s inflation cooled also, down to 2.8% in February. Other countries are showing signs of inflation easing.
Strong Labor Market Data
The jobs report released on March 8th showed more job gains, with 275,000 jobs created vs 198,000 forecasted. Unemployment rose to 3.9% versus 3.7% forecasted.
“There’s no new thing under the sun between this report and last month’s report. It doesn’t really give us a whole lot of information, other than we can qualitatively say, we’re still growing jobs at a good pace and wages are still a little bit higher than we would like,” said Dan North, senior economist at Allianz Trade Americas.
Treasury Yields Steady/Quiet in March
Treasury yields were steady or slightly lower in March versus February, with the widely monitored 10-year Treasury Note Yield closing the month near 4.205%. This was about 4.5 basis points lower than February’s closing level near 4.251%.
Market participants are figuring out the probabilities for Fed rate cuts, with data to close March showing a 95.8% probability of the Fed leaving rates unchanged at the May 1st Fed meeting and a 63.6% chance of a rate cut at the following meeting on June 12th.
The steadiness in rates during March was welcome news for mortgage borrowing activity, with the average 30-year fixed mortgage closing the month of March under the psychologically important 7% level. The quiet yields are also a supportive backdrop for long-term investors in U.S. equities.
Mixed Consumer Data
The resilient American consumer marches on! After enduring two years of escalating prices, the U.S. consumer finds a way. For March, consumer health metrics were on the mixed side.
Retail sales rebounded from January’s levels and grew by 0.6% in February, but they were below economist expectations.
The University of Michigan’s Consumer Sentiment survey also fell short of expectations in the initial release. However, the final version of the consumer sentiment data released on the last trading day of the month showed a rise in consumer sentiment.
So, it was a mixed bag for the consumer last month. Unsurprisingly, consumer debt has piled up as inflation has worn on, with data showing a smooth $1 trillion in interest payments in one quarter alone.
That said, while many data releases show a strong consumer, let’s remember that the consumer is loaded up with debt and is paying interest on that debt at a rather elevated rate.
The Takeaway
March featured a continuation of the rally that started in November, which began with excitement surrounding AI, steadier interest rates, solid economic data, and a Fed that should be supportive going forward.
Now, the rally appears to be showing signs of broadening to other sectors, which is a healthy signal. This is one reason that a diversified portfolio is a must.
The market expects three rate cuts in 2024 beginning, as the Fed wants to see further evidence that inflation has cooled sufficiently before cutting rates. The data suggests three cuts in 2024, which is supportive of that expectation.
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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. equity indexes traded lower last week as investors interpreted hotter-than-expected wholesale and consumer pricing inflation data.
Markets mostly consolidated after the hot data, however, looking ahead to the Federal Reserve (Fed) meeting this week. Here’s a quick update to keep you up to speed heading into this key meeting.
Overall Index Performance
Last week, the S&P 500 declined marginally again by 0.13%, the Nasdaq 100 fell by 1.17%, and the Dow Jones Industrial Average was close to unchanged, with a decrease of 0.02%.
Hot February Inflation Data
Consumer Price Index (CPI): Even though the headlines have been preaching the end of inflation, we have remained cautious about that narrative, as it is doubtful that inflation will decline linearly.
February CPI came in mostly hotter than expected last Tuesday, showing a 0.4% monthly increase in December and a 3.2% increase versus one year ago. Dow Jones estimates were for gains of 0.4% monthly in December and a 3.1% gain year-over-year.
The verdict? Headline CPI = warm.
Core CPI (excludes food and energy) rose 0.4% on the month and was higher by 3.8% on the year, with both data points a tick higher than expectations.
Core CPI = warmer than headline CPI.
Energy prices significantly contributed to the hotter monthly inflation print. Transportation prices also saw rises.
Market reaction to the data release was mostly muted, as the market was “clearly braced” for the CPI report coming in hotter than expected.
Sizzling PPI
After the warm CPI print on Tuesday, Thursday gave us a Producer Price Index (PPI) reading that was quite hot and significantly above expectations.
The report showed wholesale prices rising by 0.6% in February month-over-month, double the Dow Jones economist estimate for a gain of 0.3%. That’s hot. The headline number saw its largest year-over-year increase since September 2023, rising by 1.6%.
Core PPI, excluding food and energy, increased by 0.3% for the month, compared to the estimated 0.2% rise.
The PPI data release was received with a bit more concern than its CPI counterpart, as the major stock market averages closed slightly lower on Thursday with moderate follow-through selling on Friday. The S&P 500 ended the week marginally lower by 0.13%.
Federal Reserve’s Dilemma
This week, we will hear what Federal Reserve Chair Jerome Powell has to say about the warmer-than-expected inflation prints for February.
As of Friday’s market close, probabilities for 2024 Fed rate cuts via Bloomberg’s overnight index swaps data indicated a total of 2.93 (so 2 or 3) quarter-point cuts by December. Many analysts expect the first cut to occur by the “end of the second quarter”.
The Fed is in a proverbial pickle. We don’t need government data to know that inflation is still running hot. How could the Fed cut rates with high prices still hurting the pocketbooks of so many middle-class Americans?
Markets expected an “irrationally exuberant” six cuts in 2024 just a few months ago. It is a bifurcation of Wall Street’s desires and Main Street’s needs.
Treasury Yields Rise
If rate cuts are on the table in the near future, you wouldn’t know it by looking at the 10-year note yield, which rose by 21.5 basis points last week to close near 4.303%.
Hotter inflation prints translated to higher treasury yields last week, with the short end of the curve also gaining ground in yield, as 2-year note yields added close to 25 basis points to close the week near 4.730%.
2/10 Treasury Yield Inversion
Perhaps continuously overlooked, the 2/10 yield curve remains inverted. What about when it reverts or “uninverts”? The reversion of the curve has its own historical data and implications.
The 2/10 Treasury yield curve has been inverted since July 2022 or approximately 20 months. The duration and depth of the 2/10 curve inversion are truly remarkable.
The Consumer
Many economic data releases over the past year suggest a consumer with seemingly unlimited money, which has been a long-standing theme.
Last week, the consumer was painted with a different brush, with softer-than-expected data in retail sales and weaker-than-expected consumer sentiment data.
Retail sales rebounded from January’s levels and grew by 0.6% in February, but they were below expectations. The University of Michigan’s Consumer Sentiment survey also fell short of expectations.
Let’s remember that retail sales data is not inflation-adjusted, and when accounting for inflation, the data looks much different.
Has the consumer finally reached the breaking point? Logically, they probably did a while ago.
The Takeaway
Equity market indexes have been rather quiet or tired in the last couple of weeks, with potentially a new catalyst needed to stimulate buyers at these levels.
Inflation is real, even though the equity market indexes have been discounting or even ignoring the recent warm metrics amid rate-cut hopes. Could that “hope” narrative shift even further soon? Let’s see what the Fed has to say this week.
A more cautious consumer could be the future narrative amid higher prices lasting for an extended period.
Main Street USA has been seriously impacted by inflation for an extended period, and it only makes sense that analysts will begin to pay more attention to consumer strength via consumer confidence, retail sales, and other indicators of consumer strength or weakness going forward.
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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.
The last few months have been enjoyable for long-term investors who have remained disciplined and focused on their goals. The artificial intelligence (AI) theme continues to power the major U.S. stock indexes, and market sentiment remained strong in the leap day-extended month of February.
As positive market sentiment continued throughout last month, now is the perfect time to keep you informed on the latest developments. Here is the latest.
Major Stock Indexes
February rewarded long-term investors in U.S. stocks, as the S&P 500, Dow, and Nasdaq 100 had their fourth consecutive month of gains. Market bulls were cheering the prospects of a more accommodating Fed at some point, and there were many earnings results in mega-cap growth stocks supporting the positive market sentiment.
For the month of February, the S&P 500 added a healthy 5.17%, the Nasdaq 100 tacked on 5.29%, and the Dow Jones Industrial Average rose by 2.22%.
Inflation Readings: A Bit Toasty
Inflation metrics released in February showed data mostly running hotter than expected. Stock market bulls didn’t seem to mind in February, however. Anticipation of a more dovish Fed in the future, several strong corporate earnings releases, and an overall theme of bullishness all contributed to the final results in February.
Consumer Price Index (CPI): The Consumer Price Index (CPI) for January showed a monthly increase of 0.3% and a year-over-year increase of 3.1%. Estimates were for gains of 0.1% for the month and a 2.9% gain year-over-year.
Prices for goods and services remain high, and inflation is not likely to decrease linearly. Shelter and food prices were both contributors to the larger-than-expected increase. Major U.S. equity markets initially reacted sourly to the data release but shook off the jitters over the following two trading sessions.
The hotter-than-expected inflation data could give Fed watchers additional reason to reconsider the timing of rate cuts this year, should we get any.
Producer Price Index (PPI): Two days post-CPI data, we got hot producer pricing data. According to the report, wholesale prices (PPI) in January increased by 0.3% month-over-month, higher than the gain of 0.1% predicted by Dow Jones economists.
Core PPI, which excludes volatile food and energy, was the biggest surprise, as it increased by 0.5% compared to the expected 0.1% increase. Inflation is persisting, and ebbs and flows in data are to be expected.
The hotter-than-expected inflation prints led to the S&P 500 experiencing a marginal decline for the week, but bulls were back in charge the following week, sending the S&P 500 to all-time highs.
Core Personal Consumption Expenditures (PCE) Index: Core PCE (which excludes food and energy) is the Fed’s preferred inflation metric. This metric came in mostly in line with analyst estimates at the end of February, showing an increase of 0.4% on the month and an increase of 2.8% versus one year ago.
Hot Labor Market Data
The January jobs report released in early February showed a blowout jobs number with 353,000 jobs created vs. 185,000 forecasted. Is strong good employment data a good thing? It depends on how you look at it.
The January jobs data was much better than expected, suggesting economic strength. However, it also indicates that the economy may be running too hot, which could impact rate-cut hopes. Factoring in recent warm inflation data, it has become more unlikely that there will be a rate cut in March or even May.
Treasury Yields Rose in February
Inflation warming and the increased probability of any rate cuts being pushed farther into the future contributed to government bond yields rising in February.
The widely watched 10-year Treasury Note Yield rose somewhat sharply in February, closing the month at a yield near 4.251% . This constituted a rise of 28.5 basis points month-over-month.
The rise in yields naturally translated to higher mortgage rates, contributing to the higher costs of shelter — and sidelining many potential would-be borrowers.
Bitcoin Rally
The price of the largest cryptocurrency by market capitalization, Bitcoin, rose 51% in February, as demand from the newly issued spot ETFs helped to propel prices higher.
On the minds of many Bitcoin enthusiasts and proponents is the upcoming Bitcoin halving event, which is estimated to occur in April. The halving, as it is called, means that the amount of new Bitcoin created every day will decrease by 50%, creating a smaller daily addition of supply after the event.
Bitcoin fans (also known as Bitcoiners) embrace the limited supply aspect of Bitcoin versus fiat (paper currency), which is created with an unlimited supply by central banks.
So, it has been a story of basic economics lately: New supply will decrease after the halving event, and demand has increased given the new spot ETFs. The result has been higher prices.
The maximum number of Bitcoins that will ever be created (hard cap) is 21 million BTC. So far, approximately 19 million have been created (mined).
Bitcoin is a highly volatile and speculative asset and is not suitable for all investors.
The Takeaway
February featured continued overall bullish equity market sentiment supported by positive earnings results from many companies.
The warmer inflation data was merely a blip last month as far as major U.S. stock indexes were concerned. But should inflation stay running hotter than expected, it could further impact Fed rate cut hopes for the year. Inflation is very real, but it affects Main Street a lot more than Wall Street, at least for now.
Headwinds exist for equities, but you wouldn’t know it by glancing at the major stock market averages as the S&P 500 and Nasdaq 100 notched fresh all-time highs on March 1st. Long-term investing continues to be the ticket.
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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. equity indices traded well last week, with the Dow, Nasdaq 100, and S&P 500 all posting weekly gains. The upward trend continued on the heels of some blowout numbers from artificial intelligence (AI) and chip giant NVIDIA. There is a lot of buzz as a result, so here is the latest to keep you up to speed.
Overall, tallying results from last week, the S&P 500 gained 1.66% to close at an all-time weekly closing high, the Nasdaq 100 added 1.42%, and the Dow Jones Industrial Average increased by 1.30%.
NVIDIA Earnings Beat
Better-than-expected earnings results from semiconductor giant NVIDIA, released after the bell on Wednesday, propelled major U.S. stock indexes higher on Thursday, resulting in the NASDAQ rallying by nearly 3%. This was its biggest single-day gain in over a year.
What may be the stock of our time and the largest beneficiary of the AI theme, NVIDIA posted revenue up 265% courtesy of its booming AI business. The stock rose in extended-hour trading after the results and conference call and provided a monstrous dose of strength for the next day’s trading session across broader markets.
NVIDIA closed the week higher by over 8.5 %.
Fed Minutes = Mixed Tone
Perhaps overlooked by markets as NVIDIA stole the spotlight last week, the Federal Reserve (Fed) minutes from its most recent policy meeting were released last week.
The meeting minutes showed a cautious yet optimistic tone from the Federal Open Market Committee (FOMC), indicating there would be no rate cuts until Fed members have “greater confidence” that inflation is receding.
“Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 percent,” the minutes stated.
Fed Minutes Interpretation
In other words, it sounds like the Fed is more concerned with cutting rates too quickly versus too slowly. Cutting too quickly could contribute to retriggering inflation.
The comments in the minutes seemed optimistic about the progress made in the fight against inflation. Market reaction to the minutes was somewhat muted as investors eagerly awaited NVIDIA earnings results.
You can read the full Fed minutes here.
Wall Street vs. Main Street
As the AI and megacap themes fuel gains on Wall Street and for long-term investors, it is just not an accurate reflection of the “actual economy” for many Americans.
The reality for many working Americans is one of living paycheck to paycheck (with 78% of Americans in this boat) and of survival, as high prices for just about everything have taken their toll.
The disconnect between Wall Street and Main Street is perhaps more prevalent than it has ever been, and the sacrifice required to secure one’s financial future is real.
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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. equity Indexes traded slightly lower last week as investors interpreted hotter-than-expected wholesale and consumer pricing inflation data for January. Last week’s headlines have created questions, so here’s a quick update to keep you up to speed on the inflation data, along with the market reaction to it.
For the week ending February 16, the S&P 500 declined by 0.42%, the Nasdaq 100 was lower by 1.54%, and the Dow Jones Industrial Average was marginally lower by 0.11%.
January Consumer Inflation Data Runs Hot
First, on the consumer side, inflation was sticky and stubborn starting the new year. Consumer Price Index (CPI) data came in hotter than expected last Tuesday, showing a 0.3% monthly increase in January and a 3.1% increase versus one year ago. Estimates were for gains of 0.1% for the month and a 2.9% gain year-over-year.
Pragmatically, it only makes sense. We, as consumers, can see that prices remain stubbornly high across a wide range of goods and services. Plus, as previously mentioned, inflation will most likely not recede linearly, with fits and starts along the way. It will take time for inflation to come down to the Federal Reserve’s 2% target.
Shelter prices (once again) were a key driver for higher prices, with prices showing a 0.6% increase for the month. Food prices (both “at home” and “away from home”) were higher in January, by 0.4% and 0.5% month-over-month respectively, according to the data from the U.S. Bureau of Labor Statistics.
CPI Market Reaction
The market reaction was indeed sour (yet orderly) on the day of the data release, with the Dow shedding over 500 points and the S&P 500 giving back 68.67 points. But, as disciplined investors, we don’t make emotional judgments based on one day of trading or one data release.
After the initial downside reaction to the data release, the S&P 500 shook it off over the two subsequent trading sessions, clawing back the decline, trading higher for the next two days, and eagerly awaiting the wholesale inflation data to be released last Friday.
Thursday’s softer-than-expected retail sales data also helped the market to find its footing, with the S&P 500 closing at a record high heading into Friday’s Producer Price Index (PPI) data release. More on retail sales in a minute.
Wholesale Pricing (PPI) Hot Too
After the hot CPI print on Tuesday and markets having two days to digest it, Friday gave us a PPI data release that was also higher than expected, creating a double whammy on the inflation front.
The report showed wholesale prices rising by 0.3% in January month-over-month, in contrast to the Dow Jones economist estimate of a gain of 0.1%.
The biggest surprise was Core PPI, which excludes volatile food and energy, which rose by 0.5% versus the estimate for a 0.1% increase. Yikes.
The PPI data release was followed by major stock indexes trading to the downside somewhat moderately on Friday. The major stock market averages closed slightly lower for the week, and the S&P 500 had its first weekly decline in the last six weeks.
Retail Sales Miss
In “bad news was good news” fashion (at least last week), January retail sales posted a higher-than-expected decline, showing a decline of 0.8% versus expectations for a decline of 0.3% by economists surveyed by Dow Jones.
Why is this good news? The market is still so focused on the Federal Reserve (Fed) and interest rates. The weaker consumer would indicate that the economy is slowing, as the Fed has intended by hiking rates in the past.
The retail sales data was sandwiched between the CPI data released on Tuesday and the PPI data released on Friday, perhaps helping to counter the market reaction to the higher inflation prints we saw last week.
Furthermore, suppose for a moment that the consumer was also running hot in last week’s data. That would have indicated that the economy hasn’t cooled and would have increased the odds of rates staying higher for longer. That is the market logic, anyway.
However, a softening consumer is not a good thing overall. Many expected the consumer to weaken quite some time ago, with persistent inflation taking its toll. Last month’s retail sales data could be a signal that consumer resilience is finally softening.
Rate Cuts Probabilities Fall
Traders and investors have dialed back rate-cut bets and expectations in recent days.
Remember the market’s expectations for lower rates to come to the tune of 6 rate cuts in 2024? Well, how fast things can change, with the odds of the Fed leaving rates unchanged through the June meeting now 34.9%, according to Barrons via the CME FedWatch Tool.
Furthermore, remember the market’s March rate cut expectations? That is almost completely off the table, with probabilities showing a 10% chance of such an occurrence as of last Friday’s market close, down from 53.8% one month ago.
It seems the market was indeed ahead of itself in its Fed expectations closing out last year. However, anything can happen. Cue the crystal ball.
The Takeaway
It was perhaps a dose of sobering reality last week: that inflation is still with us. It cannot be all too surprising, as logic dictates inflation’s persistence in our lives. We see it every day.
But the collective market wanted rate cuts. The possibility of such cuts has diminished, as reality has caught up with the market in the form of sticky inflation.
For now, the broader U.S. stock market indexes haven’t seemed to mind, especially the large-cap S&P 500 settling last week above 5000. Tech and AI have led the narrow rally. Is the rally too concentrated and euphoric? The dips have been short-lived so far, and the S&P 500 has proven to be quite resilient.
The Week Ahead
We will see what things week brings us. Things will continue to play out this week, as markets further digest the hot inflation data on this President’s Day holiday-shortened trading week.
Economic data releases are quieter this week after last week’s barrage. However, we do get Federal Reserve meeting minutes on Wednesday and some Product Manufacturing Index data (manufacturing and services) on Thursday.
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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.
The broader major U.S. stock indexes kept chugging along last week, with the S&P 500 making fresh highs and closing above 5,000 for the first time in history. Last week’s gains for the S&P 500 marked its 14th weekly gain out of the last 15 weeks, a feat last seen over 50 years ago!
Overall, for last week, the S&P 500 climbed by 1.37%, the Nasdaq 100 rose by 1.81%, and the Dow Jones Industrial Average increased by a marginal 0.04%.
S&P 500 Closes Above 5,000
It’s all over the news, and markets are generally obsessed with round numbers. Some folks put on their party hats and get excited, but for the disciplined long-term investor, it really is just a number.
Yes, without a doubt, the major U.S. stock market averages have been in a tear as of late. In fact, the S&P 500 rose from the October 2023 lows just above 4,100 to north of 5,000 in just 15 weeks.
But there is no need for excitement when it comes to planning your financial future. Remaining steady and level-headed during both bull and bear markets is a critical component of long-term success.
To put the last 1,000 S&P 500 points into perspective, it was April of 2021 when the S&P 500 crossed the 4,000 level for the first time.
Tech in Growth Mode & To-Date Q4 S&P 500 Earnings
Earnings watchers have been pleased by several results from tech companies lately, indicating that the tech sector is back in growth mode.
Artificial intelligence (AI) continues to be a key driver in quarterly technology company conference calls, and the AI theme isn’t going away anytime soon.
For Q4 2023, with 67% of S&P 500 companies across all sectors reporting actual results, the year-over-year earnings growth rate is 2.9%.
If 2.9% ends up being the actual growth rate for the quarter, it will be the second consecutive quarter that the S&P 500 has reported earnings growth, according to data from FactSet.
Treasury Yields Rise
While markets were obsessed with the S&P 500 last week, Treasury yields quietly rose. Ten-year note yields rose by about 15.6 basis points, settling the week near 4.188%, up from their previous weekly close near 4.032%.
So, the ability of the major U.S. stock market indexes to rise with Treasury yields rising was alive and well last week, much to the displeasure of prospective mortgage borrowers, with the average 30-year mortgage rate climbing back above 7% last week before dipping slightly.
Inflation Data This Week
Consumer inflation data is on tap this week, and many investors are eagerly awaiting the release of Consumer Price Index (CPI) data on Tuesday and Producer Price Index (PPI) data on Friday.
This is an important release, and anything is possible, especially after last month’s mixed inflation data. Revisions to December data released last week showed that U.S. monthly consumer prices rose less than initially thought, however.
As I mentioned earlier, it’s important to stay calm and level-headed when investing for the long term. No one can predict with a high level of certainty whether inflation will maintain its current pace of decline.
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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.
Broad market index and tech stock investors were in command throughout January, even as the month ended with a Federal Reserve (Fed) meeting taming some potentially over-enthusiastic March rate cut bulls.
Major Stock Indexes
January was good for long-term investors in U.S. stocks, especially in megacap tech with AI exposure. Market bulls were cheering the prospects of a more accommodating Fed in 2024, with the rate decision and Fed statement happening on the last day of the month.
For the month of January, the S&P 500 added 1.59%, the Nasdaq 100 tacked on 1.82%, and the Dow Jones Industrial Average rose by 1.22%.
Mixed/Slowing Inflation Signals
The overall trend for inflation was mixed in January, even as Consumer Price Index (CPI) data came in a bit hot.
CPI: The December Consumer Price Index showed a 0.3% monthly increase in December and a 3.4% increase versus one year ago. Estimates were for a 0.2% monthly gain in December and a 3.2% gain year-over-year. Shelter and services pricing remained sticky.
PPI: For December, the Producer Price Index report came in below expectations, indicating mixed signals on the inflation front.
According to the report, wholesale prices declined by 0.1% month-over-month in December, lower than the expected gain of 0.1% estimated by Dow Jones economists.
PCE: According to the most recent Core Personal Consumption Expenditures (PCE) release, the rate of price increases slowed down as 2023 came to a close.
The Fed’s preferred inflation indicator showed that prices were higher by 0.2% month-over-month in December and by 2.9% year-over-year. Dow Jones economists had expected respective increases of 0.2% and 3%.
However, digging a little deeper and looking at the three and six-month averages of Core PCE on an annualized basis, we see it running under 2% (the Fed’s Target is 2%).
This data, noted by former Vice Chair of the Federal Reserve Lael Brainard and provided by the Bureau of Economic Analysis, has inflation watchers cheering the current market environment.
Fed Put?
In plain English, a “Fed put” means that the Fed is standing by to change policy if needed, should the equity markets experience declines.
At present, it feels like there are the makings of a Fed put under the market. If storm clouds arise, the market is expecting the Fed to “come to the rescue” with rate cuts in 2024 if needed.
The market was expecting six rate cuts in 2024 before the January Fed meeting, even though the economy has been performing well as of late. This outlook is not the norm. Historically, rate cuts are seen in struggling or downtrodden economies that need stimulation.
The January Fed meeting tempered expectations for a March rate cut, with probabilities declining from 50% to 35.5% on January 31. However, it is still early in this election year.
This idea of a Fed put is a concept, not a guarantee, and seemed to be on the mind of many market participants at the start of February, indicating that the collective market mindset could be that any pullbacks may be short-lived.
Treasury Yields Steady in January
The widely monitored 10-year Treasury note yield was close to unchanged for the month of January, closing the month near 3.966% — about 10 basis points higher than December’s closing level near 3.865%.
January marks two consecutive monthly closes below 4.00% in the 10-year yield.
The steadiness in rates is good news for sidelined prospective mortgage borrowers and great news for long-term investors in U.S. equities.
Fed Rate Decision
The last day of January gave us the first Fed meeting of 2024, as the Fed left interest rates unchanged in line with market expectations.
There were some changes to the Fed’s statement, however, as Federal Reserve Chair Jerome Powell seemed to want to tame the market’s excitement for a March rate cut.
“I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to cut rates,” Powell said.
The verbal statement indicating that a March rate cut is not likely poured some water on the fire of potentially overly enthusiastic stock market bulls as the major averages pulled back during and after Powell’s commentary.
Powell did signal rate cuts at some point in 2024, however.
“It will likely be appropriate to begin dialing back policy restraint at some point this year,” said Powell.
Consumer & Employment Strong
Consumer health metrics remained strong during January, even as many analysts expect the consumer to “tap out”.
At the same time, labor market data exceeded expectations for December, showing 216,000 jobs created. Government jobs and health-care-related fields led the way.
Starting the month of February, the latest employment report blew away all expectations, showing 353,000 jobs created in January versus 185,000 estimates by Dow Jones. The labor market continues to surprise to the upside, and the market reaction was an interesting one.
January Labor Data Market Reaction
While the massively better-than-expected January jobs data indicates a stronger economy, it also shows that the economy may still be running hotter than the Fed wants to see. This reinforces the logical probability that a March rate cut could be off the table.
Major U.S. stock indexes didn’t seem to mind, though, as they cheered the data by trading to the upside on the day of. The jobs report was released the morning after positive earnings results from Meta (Facebook), Microsoft, and Amazon. So, perhaps this earnings effect outshined the March rate cut odds everyone seemed to be so fixated upon just a day before.
The probability for a March 25-basis-point cut was all over the place at the end of January and beginning of February, resting at a 20% chance on February 1 after sitting at a 46.2% chance on January 26th, according to the CME FedWatch Tool.
Is the economy still too hot? What do the continuing and massive upside surprises in the job market mean for inflation?
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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.