June 17, 2024

“A father is neither an anchor to hold us back nor a sail to take us there, but a guiding light whose love shows us the way.”

Author Unknown (but he or she nailed it!)

Happy belated Father’s Day to all the markets last week gave much to talk about. Here are the numbers. The S&P 500 finished the week down on Friday but for the week up with a new high. The Dow Jones Industrial Average did not fare so well continuing the slide, down .50% the Nasdaq continued its strength up 3.54%. Internationally, the FTSE 100 lost 1.19% and the MSCI-EAFE gave back 1.03%. 2-year treasuries closed with a yield of 4.707% and the 10-year paid 4.221%.

So, what happened last week? The big news everyone expected was The Federal Reserve left its key interest rate policy unchanged on June 12, while officials at their latest monetary policy meeting predicted one rate cut this year. And Inflation news was positive. As Market Beat noted, equity markets surged to new highs last Wednesday, but the move was cut short later in the day. The early rise was driven by a cooler-than-expected CPI release that led the market to believe the FOMC will be lenient later this year. The move was cut short by the FOMC policy statement, which unequivocally stated that there would only be one interest rate cut this year. While the CPI data is good, it is only a single month of data after months of little to no movement, and the CPI is not the Fed’s preferred gauge. The takeaway from the policy statement is that inflation has moderated but is still elevated, and a sustained movement closer to 2% is needed. Based on the trends and new Fed dot-plot data, the FOMC may back off this stance later this year and not cut rates until early 2025.

The S&P 500 set a new high and may continue higher despite the latest twist in the FOMC outlook. High inflation and interest rates are negative for the market, but the underlying cause is economic growth. In this situation, inflation and rates are a worry but insufficient to cause a major stock market correction without a change in the earnings outlook. The S&P 500 is expected to accelerate earnings growth sequentially through year’s end and year-over-year this year and next and will likely continue trending higher until that changes.

MarketWatch added, U.S. wholesale prices fell in May for the second time in three months — thanks partly to lower gas prices — in perhaps another sign an upturn in inflation earlier this year is fading. The producer-price index dropped 0.2% last month, the government said Thursday. Economists polled by the Wall Street Journal had forecast a 0.1% increase. More important, a separate measure of wholesale prices that strips out volatile food and energy costs and trade margins was flat for the first time in a year.

The Federal Reserve views core prices as a better predictor of future inflation. The rate of inflation is still running above the Federal Reserve’s 2% annual goal, but the latest CPI and PPI reports suggest the central bank is making progress. Both indexes feed into the Fed’s preferred inflation gauge, the personal consumption expenditures index. The May PCE will be released in two weeks. The rate of inflation using the PCE index is 2.7%. Even the Fed is skeptical, though, that the rate will fall much further in 2024.

On the Jobs front…Initial jobless claims surged by 13,000 — to 242,000 — in the week ending June 8, the Labor Department said Thursday. That’s the highest level of claims since last August. Economists polled by The Wall Street Journal had estimated new claims would fall to 225,000. Last week claims were unrevised as a rise of 8,000 to 229,000. The U.S. unemployment rate drifted to 4% in May, the highest level since 2022. The labor market is no longer overheated, Federal Reserve Chair Jerome Powell said last Wednesday.

As Barron’s financial journalist’s consensus reports, the reaction to the Fed’s new forecasts last Wednesday seems puzzling. The dot plot—a sketch of how policymakers see the economy unfolding—showed fewer cuts than it did previously and inflation ending the year higher than shown before. An interest rate reduction earlier than December looks like a long shot. Nevertheless, bond yields fell—implying lower rates in the longer term—and stocks surged to close at new record highs. That suggests investors are more confident than the Fed that inflation is still on track to return to the 2% target. That thought was encouraged by the better-than-expected consumer price index reading Wednesday. Thursday’s producer price data make a more complete picture. Stocks rallied, then gave up some of those gains on Fed Chair Jerome Powell’s remarks, but still finished higher for the week.

On the housing front… Housing-related inflation continued to be problematic in May, up 0.4%, but there was a meaningful slowing in several other big-ticket categories within services. Inflation in healthcare, motor vehicle insurance, and airfares all decelerated.

What to do? We will continue to add to the value side of the market, translation… Mature companies that pay dividends collect our short-term yields, and move slowly to intermediate term bond positions.

Mike