July 8, 2024

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”

 Robert Kiyosaki

Happy post 4th of July, as the markets had a shortened week, mostly positive and new record highs were achieved. The S&P 500 booked its 34th record close of 2024, while the Nasdaq logged its 24th all-time closing high this year, according to Dow Jones Market Data. Here are the numbers. The S&P 500 gained 1.43% overall for the week, the Dow Jones Industrial Average added .73%, the Nasdaq roared up 2.58%. Internationally, the FTSE 100 added ,49% and the MCSI-EAFE added .16%. The 2-year Treasury closed with a yield of 4.71% and the 10 year was spooked by some unemployment numbers and closed paying 4.277%.

So, as we enter the third quarter, some economic data, political realities and earning estimates seem to be presenting a clearer picture for the rest of the year. As MarketWatch notes, Wall Street, for now, expects S&P 500 companies overall to put up earnings per share growth of 8.8%, according to a FactSet report on Wednesday. If that number sticks, it would be the biggest gain since the 9.4% increase in the first quarter of 2022, that report said. Profit margins are expected to come in at 12% for companies in the index. Some economists over the past few years have suspected that companies have kept prices high to fatten those margins, despite consumers’ struggles to keep up. Those gains boil down, in part, to easier comparisons against last year, as cost cuts filter through to the bottom line. But as with previous quarters, they’ll be driven by a handful of massive technology companies as well, whose stock prices and bottom lines have also benefited from artificial-intelligence hype.

Yields on government bonds rose following the presidential debate, the Wall Street Journal noted last week, as traders prepared for the possibility of higher prices and debts under Trump’s plans for tax cuts and tariffs. Analysts at Keefe, Bruyette & Woods noted an uptick in smaller bank stocks, as some investors bet on the greater likelihood of deregulation and mergers and acquisitions. Trump has been increasingly forthcoming on his plans, and Wall street seems to be continuing to acknowledge our suspicion that the money on the street points to a Trump win and some serious damage to the Democrats’ ability to limit his agenda.

The only question between now and the election is what they will do with their top of the ticket problem, and how much damage will it cause down the ticket. Regardless, as we focus on basic economic data that drives this market, Wall Street seems to view all of this as a sideshow.

The Bureau of Labor Statistics lowered its April and May jobs numbers by a combined 111,000. The revision could signal a cooling economy, enabling the Federal Reserve to begin cutting interest rates soon.

On the jobs front, as it affected long rates last week, Megan Leonard of Barrons reports, “The latest revisions also bring the 3-month payroll average to 177,000, the slowest pace logged since January 2021,” my colleague Megan Leonhardt reports.  The probability of at least one-quarter point rate cut by September now stands at 77%, up from 64% a week ago, according to Fed Funds futures tracked by CME Fedwatch.

From Market Watch on the Federal Reserve, the minutes of the Federal Reserve’s June meeting show officials are not in any agreement over how many months of good inflation data might be needed before the central bank might be confident enough that low inflation was here to stay before cutting interest rates. Officials “noted that the uncertainty associated with the economic outlook and with how long it would be appropriate to maintain a restrictive policy stance,” the minutes said. Some Fed officials “emphasized the need for patience” in allowing the Fed’s current level of rates to dampen demand and moderate inflation pressures. Several officials said that rate hikes might be needed if inflation stays at its elevated level or increases further. On the other hand, a “number” of Fed officials said the Fed should stand ready to respond to “unexpected economic weakness.” There was some concern that the labor market was softening, and that slowing demand might generate “a larger unemployment response” than had been seen in the recent past. Fed Chairman Powell said last Tuesday, that while the U.S. has made “quite a bit of progress” in bringing inflation back down to the Fed’s 2% target, officials “want to be more confident” about this downward trajectory before cutting rates. He declined to mention the likely timing of the first rate cut, and said central bankers are well aware of the risks of cutting either too soon or too late. So much for a clear direction for interest rates.

The unemployment rate, which jumped up from 4.0% to 4.1%, was downplayed by the White House but it does indicate not everything is hunky Dorey in the economy, this week’s inflation numbers will tell us more. Inflation is still stubbornly holding on and the cumulative effect is ever present.

All in all, we expect the market to chug along with the usual fireworks and reactions from the election year posturing. But fundamentally if earnings do not disappoint, we should have a decent second half of the year. So far so good.

Mike