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Economic Update 8-26-2024

  • Economic data for the week included stronger new and existing home sales reports, along with mixed PMI manufacturing and services sentiment, and a weaker month from the index of leading economic indicators.
  • Equities gained globally last week, along with further hints of easing central bank policy. Bonds similarly gained as yields fell. Commodities were mixed, with stronger metals and weaker crude oil prices.

U.S. stocks ended positively for the week, despite low summer trading volumes, with decent economic results and the dovish tone of the FOMC July minutes. Gains culminated on Fri. by the further dovish tone of Fed Chair Powell’s Jackson Hole speech. Nearly every sector saw gains last week, led by materials, consumer discretionary (largely helped by Target and TJX), and industrials, while energy experienced a minor decline. Real estate also rose nearly 4% on the sentiment surrounding lower rates, which has been one of the primary drivers of that sector in the near-term. Small cap reacted especially strongly to the hints of upcoming rate cuts, as would be expected. Focus remains on the consumer, with added sensitivity to signs of potential weakness in corporate earnings commentary, as well as the mix of product type and purchaser demographic/income level.

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Economic Update 8-19-2024

  • Economic data for the week included both producer and consumer price indexes coming in lower, showing continued deceleration toward more normal levels. Retail sales and consumer sentiment improved, while industrial production and housing starts declined, with the latter likely driven by weather-related events.
  • Equities gained ground globally, following a week of high volatility, with both the U.S. and foreign markets seeing similar gains. Bonds also fared well as yields fell in response to decelerating inflation. Commodities were mixed with metals up and energy down, despite higher Middle East tensions.

U.S. stocks reversed course from the prior week’s volatility, earning the best weekly returns in a year. By sector, growth leadership resumed with technology gaining nearly 8% (led by a 20% rise in NVIDIA), followed by consumer discretionary up over 5% (with Starbucks gaining sharply after appointing a new CEO from Chipotle). Laggards included communications, as well as energy and utilities, all of which were up only about a percent. Real estate was only slightly positive. Interestingly, declines in Alphabet/Google have been somewhat muted considering the U.S. Justice Department’s interest in potentially breaking up the firm due to what are claimed to be monopolistic practices.

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Economic Update 8-12-2024

  • In a week of limited economic data, reports included improvement in ISM services indexes, while jobless claims fell back from recent higher levels.
  • Equities continued to experience the highest levels of volatility in months, with a net result of little change for the week in the U.S. and small gains in foreign markets. Bonds fell back generally, along with a backup in yields. Commodities saw gains, led by crude oil as demand worries faded a bit.

U.S. stocks experienced one of the more interesting weeks in some time—in fact, it featured the single worst and single best days since 2022. By sector, industrials and energy led with gains of over a percent each, while laggards included materials and consumer discretionary (Tesla and McDonald’s), each down over -1%. Real estate fell back only slightly, despite the sharp rise in yields, which also negatively affected small caps broadly.

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Economic Update 8-05-2024

  • Economic data for the week included the U.S. Federal Reserve keeping key interest rates steady, as expected. On the positive side, pending home sales rose, while negative data included ISM manufacturing, construction spending, and jobless claims. The monthly employment situation report for July disappointed, with fewer jobs and a higher unemployment rate.
  • Equities fell back globally, with economic and policy concerns outweighing decent U.S. corporate earnings reports. Bonds fared quite well as interest rates plummeted across the curve. Commodities lost ground for the most part, due to demand concerns, with the exception of precious metals.

In what some have called one of the more important weeks of the year thus far, the U.S stock market did not disappoint in terms of volatility. While a Wed. rally came along with Fed hints toward a September start to interest rate cuts, by Thu., weaker economic growth, including manufacturing ISM and jobless claims, as well as the employment report on Fri., which reversed that exuberance in a downward direction, raising some concerns the Fed has waited too long to ease and/or that their language about a Sept. cut wasn’t quite convincing enough. Non-committal language has often been the hallmark of the Fed, as it’s been more focused on keeping itself flexible in response to changing conditions; however, weakening in a few areas certainly does raise the odds for a Sep. cut, as well as potentially for cuts in Nov. and Dec. as well, as needed. In fact, after the weak July jobs report, odds have risen for a -0.50% cut by Sep. (possibly assuming a cut made in-between meetings, which the Fed can do, at the risk of raising market anxiety even further), to a year-end rate of 4.00-4.25% (implying five cuts in total). In addition, some polls have shown a slide in former President Trump’s odds versus Vice President Harris, which has caused an unwind for stocks tied to benefits of a pro-business and looser regulatory regime.

By sector, only the traditional defensives of utilities, health care, and consumer staples ended the week with gains, while declines were focused in technology and energy, each down -4%. Real estate also fared positively, up over 4%, as interest rates declined. Value lagged slightly less than growth, while small cap fell back relative to large cap.

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Economic Update 7-29-2024

  • Economic data for the week included 2nd quarter U.S. GDP ramping back up to above-trend levels, a mixed environment for recent durable goods orders, and declines in both existing and new home sales.
  • Equities were mixed last week, with gains in U.S. value and small cap, offset by declines in U.S. growth and internationally. Bonds gained along with falling yields, as inflation remained contained. Commodity prices fell across the board last week, led by energy and metals.

U.S. stocks were mixed again last week with ‘value’ ending in the positive, outperforming ‘growth,’ which saw sharp declines. Small cap also ended several percentage points higher, continuing a stretch of recent rapid outperformance. By sector, utilities, health care, materials, and financials ended in the lead with gains of over 1%, while communications (Alphabet and Disney), consumer discretionary (Tesla and Starbucks), and technology lagged with declines of several percent. Real estate ticked slightly higher, as interest rates declined.

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Economic Update 7-22-2024

  • Economic data for the week included retail sales coming in stronger than expected, in addition to gains in industrial production and housing starts. The index of leading economic indicators continued to decline, albeit at a slower rate than the prior month. Political rhetoric on both sides appeared to be a stronger driver of investment sentiment for the week.
  • Global equities lost ground last week based on a variety of concerns, notably potential tighter chip restrictions on China, which punished technology stocks. Bonds also fell back as yields rose across the board. Commodities were generally down along with a stronger dollar, with declines in industrial metals and energy.

U.S. stocks behaved unusually last week, with a sharp reversal downward in large cap growth segments, offset by better returns from cyclicals, which included value and especially strong relative results from small cap stocks. In fact, the partial recovery of small cap compared to large cap was one of the fastest in recent memory. By sector, energy led with a gain of 2%, followed by financials and consumer staples. On the negative side, technology suffered with a -5% loss (highlighted by Nvidia’s near -10% decline), along with communications and consumer discretionary, each down nearly -3%. Real estate fared positively, despite interest rates inching higher.

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Economic Update 7-15-2024

  • Economic data for the week included consumer price inflation coming in slower than expected, continuing a path of deceleration, while producer price inflation ticked up a bit from recent trend. Consumer sentiment continued to be negatively affected by higher price levels of the past several years.
  • Global equities gained ground along with the lower U.S. inflation report and dovish central bank commentary. Bonds also fared well, along with falling yields, especially in foreign debt markets as the dollar weakened. Commodities generally lost ground for the week.

U.S. stocks saw gains last week, with small caps up sharply relative to large caps, reversing weakness from much of this year. By sector, ‘value’ outperformed ‘growth,’ with utilities, materials, and health care seeing the strongest results of around 3% or better, while communications fell by over -3% (led downward by Meta and Netflix) and minimal gains in technology. Real estate gained over 4% along with the fall in yields.

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Economic Update 7-08-2024

  • On a holiday-abbreviated week, economic data included ISM manufacturing and services both falling and ending June in contraction. The employment situation report was strong on a headline level, but less so under the surface, with the unemployment rate rising by a tenth of a percent.
  • Equities gained ground worldwide last week, in both developed and emerging markets. Bonds also rallied as yields fell, especially in foreign markets as the U.S. dollar declined. Commodities fared well as the price of oil rose by a few percent.

U.S. stocks gained last week, with large cap growth outperforming, while small caps lagged with a decline. Fed Chair Powell’s speech at the ECB Forum on Central Banking in Portugal was taken well by markets, noting the growth in “two-sided” risks in achieving employment and inflation goals, which was a “big change” compared to a year ago. By week’s end, the June employment situation report was nuanced enough to show weakening at the edges, which was seen as potentially moving toward the path of at least some Fed easing becoming appropriate sooner than later. Earnings releases for Q2 are beginning this week, to likely take over investor attention.

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Economic Update 7-01-2024

  • Economic data for the week included the final release of Q1 U.S. GDP being revised up slightly, flattish durable goods orders, rising home prices, and lower new home sales. On the inflation side, core PCE continued to decelerate lower.
  • Equities were mixed last week, with flattish results in the U.S., except for small cap, which gained, and varied results abroad. Bonds generally lost ground as yields rose. Commodities were little-changed with a slight rise in the price of crude oil.

U.S. stocks were mixed last week, with large caps little changed, and small caps seeing gains. The end of the quarter has tended to be an unusual time, due to a variety of portfolio clean-up, ‘window dressing,’ and index rebalancing issues as considerations, leading to movements in both directions. It’s also possible that President Biden’s perceived poor performance in the first candidate debate caused another cloud to form over the election, with markets disliking uncertainty more than anything. By sector, energy led with gains of nearly 3% (with rising odds of a Trump victory pointing to better prospects for fossil fuels rather than green energy), followed by a slight gain in communications. On the lagging side, materials and utilities lost about a percent. Real estate gained despite interest rates ticking higher.

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Economic Update 6-24-2024

  • Economic data for the shortened week included some gains in retail sales and better results for industrial production, while existing home sales and housing starts fell back.
  • Equities saw further gains globally, led by international more than U.S., where value outpaced growth. Bonds were mixed to lower as yields ticked higher. Commodities were also mixed, with declines in grains offset by a rise in crude oil.

U.S. stocks saw moderate gains in the four-day trading week, with mixed economic data to react to. By sector, consumer discretionary, energy, financials, and industrials all saw gains of at least a percent, which led to sharper ‘value’ outperformance over ‘growth’ for a change. Utility and technology (mostly due to Nvidia and Apple) stocks lagged the pack with negative returns, with the aside that Nvidia overtook Apple and Microsoft as the largest stock in the world, as measured by market cap. Real estate also fell back by nearly a percent with yields moving higher.

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Economic Update 6-17-2024

  • Economic data for the week included the Federal Reserve meeting ending with no policy change, as expected, with continued hawkish views compared to earlier this year. Consumer and producer price inflation metrics both showed positive signs of slowing this week, albeit driven by volatile energy prices. Consumer sentiment remained weak.
  • Equities were mixed globally, with gains in the U.S. and emerging markets, while Europe and Japan experienced declines. Bonds rallied upon lower inflation and resulting lower yields. Commodities gained due to strength in crude oil.

U.S. stocks saw gains, led by improved inflation numbers mid-week, and subsequent drop in interest rates, as well as seemingly continued optimism over artificial intelligence (particularly as related to new Apple products). By sector, technology again led the way, up 6% percent with strength from several members, including Apple, Microsoft, Nvidia, and Adobe. The majority of other sectors ended in the red, led by -2% declines in financials and energy. One of the more volatile stocks was Tesla, which finally ended in the positive after Elon Musk’s massive pay package was approved by shareholders. Real estate also saw gains of over a percent in response to falling yields.

Fed Note - 6-12-2024

6/12/2024 brad

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The Federal Reserve Open Market Committee (FOMC) kept the federal funds rate unchanged at 5.25-5.50% in their June meeting, continuing the range set since July 2023 without any dissenting votes. The formal statement was only slightly adjusted to reflect "modest" progress towards their inflation goal. The June Summary of Economic Projections (SEP) updated the Fed funds rate estimates for the end of 2024, 2025, and 2026 to 5.1%, 4.1%, and 3.1%, respectively. This marks an increase of 0.5% for 2024 and 0.2% for 2025 from the March estimates. The FOMC's "dot plot" now suggests 1-2 rate cuts this year, down from the three expected in March.

Market expectations, as seen in the CME Fed funds futures, had nearly guaranteed no change in rates for the June meeting, with odds for July ranging between 80-90% for no change. September odds for a quarter-percent cut have risen to over 60%, while December expectations hover around two cuts. Projections for September 2025 indicate rates might fall to approximately 4.00%, implying 5-6 cuts from current levels.

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Economic Update 6-10-2024

  • Economic data for the week included gains in ISM services coupled with a decline in ISM manufacturing. The monthly employment situation report came in stronger than expected.
  • Equities earned positive results globally last week, led by the U.S. growth sector. Bonds also fared positively, as interest rates broadly declined. Commodities fell across the board last week.

U.S. stocks fared positively again last week, with investors digesting the mix of economic data. Interestingly, despite a weaker start Fri., stocks shrugged off the strong May employment report, although the strength implied a longer timeline for a Fed pause. By sector, leaders were technology (with strength in Nvidia, helped by the release of a new generation of chips, and perhaps also by a 10-for-1 stock split) and health care, with gains of 4% and 2%, respectively, followed by communications and consumer discretionary; utilities and energy lagged with declines of over -3%. Real estate was little changed, despite the fall in interest rates during the week. Large caps outperformed small caps.

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Economic Update 6-03-2024

  • For the short holiday week, economic data included U.S. GDP growth being downgraded a few tenths, continued improvement in lower PCE inflation, higher home prices, and improved consumer sentiment.
  • Equities were mixed globally, with developed markets down a bit on net, while emerging markets fell further. Bonds were little changed domestically, while foreign markets saw mixed results. Commodities fell back across a variety of sectors.

U.S. stocks fell on the shortened week, but ended May with solid gains to offset weakness from the prior month. By sector, energy and utilities led the way with gains upward of 2%, while technology fell back by over -2% (as a positive week for some stocks was offset by weakness in Salesforce, Adobe, and Microsoft). Real estate also gained, with Friday’s ‘less bad’ inflation news providing a boost.

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Economic Update 5-28-2024

  • Economic data for the week included stronger PMI activity surveys for manufacturing and services, and durable goods orders, while housing sales data came in weaker.
  • Global stocks were mixed last week, with the U.S. faring a bit better overall, while foreign stocks lagged, especially in emerging markets. Bonds fell mildly along with higher interest rates during the week, as the chances of the Fed and other central banks easing policy sooner faded. Commodities were mixed, with agriculture higher, and energy and metals lower.

U.S. stocks were mixed last week, with technology closing with gains over 3% (leading the Nasdaq to more all-time highs), while all other sectors fell back, led by the largest losses from energy and financials. The earnings report for the Magnificent 7 member Nvidia was closely-awaited on Wed., which resulted in another strong report, in addition to a dividend raise and 10-for-1 stock split, and 15% return on the week. Real estate also fell back by nearly -4% along with higher interest rates, which punished the ‘value’ segment in general. Small cap stocks also underperformed large caps.

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Economic Update 5-20-2024

  • In a busy week for economic data, most of which was keyed in on inflation, consumer and producer prices continued strong in April, but showed signs of stabilization. Retail sales and industrial production were little changed, while housing data was mixed.
  • Equities rose globally with eased U.S. inflation and government stimulus in China. Bonds fared well as yields declined, especially in foreign markets due to a weaker dollar. Commodities were generally higher, led by metals and crude oil.

U.S. stocks experienced positivity all week, with the S&P 500 and Nasdaq back to new record highs, based on slow downward progress in inflation reports taken well by financial markets, in addition to mixed economic data that could be seen as pushing the Fed in a more dovish direction. Nearly every sector experienced a gain last week, led by technology up 3% (Apple and Nvidia, but also others), followed by health care and communications; on the other end, industrials lost a fraction of a percent last week. Real estate also fared positively, as interest rates fell back. The Dow Jones Industrial Average achieved the milestone of 40,000, which is not meaningful in and of itself due to the unusual and antiquated structure of the index, but the media often reports on these round numbers when reached. In a bull market, that may provide an extra sentiment boost, fueled by some ‘fear of missing out,’ for investors who haven’t been paying as much attention.

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Economic Update 5-13-2024

  • In a light week for economic data, jobless claims ticked higher, while consumer sentiment dropped sharply.
  • Equities saw gains in the U.S. and Europe, with marginal economic data keeping hopes alive for lower rates. Bonds were little changed in the U.S. on net, while foreign bonds were held back by a strong dollar. Commodity gains were led by precious metals and agriculture, while crude oil was little changed.

U.S. stocks saw a positive week, the third in a row, with price levels inching back toward all-time highs. This was in keeping with low volume, with little new economic data during the week. By sector, utility stocks led the way again, up over 4% on the week, followed by solid gains of over-2% in financials, materials, industrials, and consumer staples. Consumer discretionary lagged with minimal gains for the week, largely due to a sizable drop in Tesla shares. The somewhat surprising strength of lower-beta utility stocks has been seemingly led by strong earnings showings in Q1, hopes for lower rates later this year, and perhaps most importantly from sentiment, with an expected ramp-up in electricity needs from artificial intelligence in coming years.

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Economic Update 5-06-2024

  • Economic data for the week included the FOMC meeting ending in no action, as expected, with dovish undertones at the press conference. Both ISM manufacturing and services fell back into contraction, while the employment situation report came in weaker than expected. Home prices continued their stretch of gains by several measures.
  • Stocks gained ground globally last week, with strong corporate earnings, but also weaker economic data that pointed to interest rates eventually dropping down the road. Bonds fared positively along with lower yields. Commodities fell back sharply, as oil prices declined for a variety of market and geopolitical reasons.

U.S. stocks turned the corner on a negative April, with gains last week. Softness early in the week appeared related to poor consumer sentiment and the looming Fed decision, as well as the attached message. On Wed., after the Fed meeting, markets had started down nearly a percent but completely reversed to up a percent by the time the press conference had started, before reversing backwards again. The discussion took on a more dovish tone than expected, highlighted by the answer of rate hikes ‘not really on the table’—removing a key tail risk markets had been worried about. The rally Fri. was directly related to a weaker-than-expected jobs report, and moderating wage pressures, that also restrained the ‘too hot’ economy risk and kept hopes for rate cuts alive.

Fed Note - 3-20-2024

3/20/2024 brad

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At their March meeting, the Federal Reserve Open Market Committee kept the Fed funds range unchanged at 5.25-5.50%, where it’s been since last July. There were no dissents. The formal statement today was barely changed from January, when it was updated to a narrative depicting a more ‘balanced’ set of risks. Today, job gains were described from ‘moderated’ to ‘remain strong.’

Based on CME Fed funds futures markets, the probability of no action for March had risen to 99%, being in the high 90’s over the past month. For June, the chances of at least one 0.25% rate cut have run about 55-60% over the last few weeks. For September, the highest odds point to two cuts, and by December, the base case is three cuts to 4.50-4.75%. For Sept. 2025, the furthest-out estimate, the highest odds are for 5-6 cuts to around 4.00%. The number of assumed rate cuts has fallen over the last few weeks, as today’s sentiment reflects the narrative of improved growth and still-sticky inflation.

The Fed’s quarterly Summary of Economic Projections (SEP) included the ‘dot plot’—a chart that features committee member opinions of future Fed funds rates. One question has been whether the long-term neutral rate estimate would rise from its long-standing 2.5% level, reflecting more persistent inflation, larger fiscal deficits and debt, and perhaps the Fed’s reaction with a higher neutral rate level. Compared to December, the expected Fed funds rate was unchanged at 4.6% for 2024, up 0.3% to 3.9% in 2025, up 0.2% to 3.1% in 2026, and the long-term rate up a tenth to 2.6%. Though seemingly small changes, they represent an evolution in the thinking of the Fed about the prospects for long-term inflation and their ability to control it.