April 29, 2024

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

Albert Einstein

This week was the Good the Bad and the Ugly. But first the numbers: The S&P 500 snapped back +2.7%, the Dow Jones Industrial Average added .32%, the Nasdaq recovered +3.45%. Internationally the FTSE 100 grew by 3.09% and the MSCI-EAFE added 2.4%. The two-year treasury yield closed Friday at 4.97% and the 10-year was 4.62%.

The Good: Stocks returned to the black last Monday, delivering a broad rally following recent declines. More than 400 S&P 500 constituents finished last Monday in the green, as all 11 sectors in the index rose. The S&P 500 finished up 0.9%, snapping a six-day losing streak. As U.S. stocks have kicked off last week with a rally, Wall Street’s fear gauge is dropping after shooting higher earlier this month, as interest rates rose and tensions in the Middle East intensified. The “market rebound continues,” said Louis Navellier, chief investment officer at Navellier, in emailed comments Tuesday. The recovery is broad, with “softer interest rates and a lower VIX.” Gold, dollar decline Oil risks remain. U.S. stocks pared their April losses on Friday, with the S&P 500 booking its biggest weekly gain since November as Big Tech stocks rallied.

While Wall Street’s fear gauge subsided again last Tuesday, investors continue to watch the Middle East for any signs of a widening conflict. In a research note last Monday, market analysts at JPMorgan Chase & Co. cautioned that after Iran’s attack on Israel, “we believe there is complacency regarding geopolitics again after oil’s pullback.” They also said that the recent rallies in “base and precious metals prices have further to run in 2024, as geopolitics remain a bullish-skewed wildcard.”

The Bad: A surprisingly high inflation reading in the first quarter (sending the market into a one-day panic) has raised anxiety about whether a key price index in March could be worse than expected and could lower the odds of U.S. interest-rate cuts. Gross domestic product, the official scorecard of the economy, showed that inflation rose at a 3.4% annual rate in the first quarter, compared with 1.8% in the final three months of 2023.

As MarketWatch Jeffry Bartash reports, prices in the U.S. jumped again in March based on the Federal Reserve’s preferred PCE index, signaling that progress on reducing inflation has stalled. The PCE index rose 0.3% last month, the government said Friday. Economists polled by The Wall Street Journal had forecast a 0.3% gain. The more closely followed core rate that strips out food and energy also increased 0.3%. The inflation readings in February and January, meanwhile, were revised to show slightly bigger increases than previously reported. But the changes were small enough that the prior estimates for headline and core PCE were basically unchanged. But, the core rate of inflation, which omits food and energy, also recorded a 3.7% annual rate of increase in the first quarter, up from 2%.

Economists had only expected the core rate, which is viewed as a better predictor of future inflation trends, to move up to 3.4%. Inflation is no longer slowing, and perhaps worse, it might even be on the rise again. The Fed is trying to get the rate of inflation down to 2%. Meanwhile, a fresh reading Friday from the personal-consumption expenditures price index showed that U.S. inflation rose in March in line with Wall Street’s expectations. PCE data indicated that core inflation, which excludes energy and food prices, rose 0.3% last month for an annual pace of 2.8% — the same year-over-year rate seen in February.

The Ugly: Dwindling savings and a pullback in consumer spending to start 2024 were in focus last Thursday, after U.S. economic growth in the first quarter came in less robust than expected. The personal savings rate, as a share of disposable income, fell to 3.6% in February, from a pandemic peak of 32% in 2020, according to St. Louis Federal Reserve data.

Orders for durable goods made in the U.S. jumped 2.6% in March, but most of the increase was tied to new autos and passenger planes. Orders barely rose outside of the transportation sector in a sign of ongoing manufacturing weakness. The manufacturing side of the economy is undergoing a slow thaw after being frozen in place for a few years, but business is unlikely to heat up until inflation falls further and the Federal Reserve cuts interest rates. The increase in overall orders was the biggest since November, matching the forecast of economists surveyed by the Wall Street Journal.

Any other good news? Oil prices declined last Monday, with the global benchmark ending at its lowest level since late March as Middle East tensions appeared to ease, calming concerns over the potential for disruptions to global crude supplies.

And what is the Federal reserve up to? The Fed will announce its next decision on interest rates after its two-day policy meeting concludes this week on May 1. Traders in the federal-funds-futures market anticipate the central bank will cut rates this year, potentially starting in September, according to the CME FedWatch Tool on Friday.

The economy appeared to grow at an above-average speed in the first quarter, but sticky inflation is likely to prevent the Federal Reserve from cutting interest rates soon.

The persistence of elevated inflation and high borrowing costs could also weigh on the economy in the spring and summer.

A bright spot? Sales of newly built homes in the U.S. rose in March, posting the biggest increase since December 2022. Home buyers snapped up new homes, pushing sales to the highest level since September 2023, just before the 30-year mortgage rate began its trek to 7%. Home builders continue to enjoy strong demand from home buyers, driven by an ongoing lack of home listings due to the lock-in effect. (People who would normally upgrade or sell but are holding because they have 2-4% mortgage rates they don’t want to give up.)

Another good statistic: Initial jobless claims fell by 5,000 to 207,000 in the week ended April 20, the Labor Department said Thursday. It is the lowest level in nine weeks, when claims hit 200,000 in the week ended February 17. Jobless claims have been remarkably stable, showing no signs of stress in the labor market.

MarketWatch notes…Thursday’s report on U.S. gross domestic product in the first quarter pointed to “the worst of both worlds” from the standpoint of growth and inflation, according to Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“Economic growth is slowing and inflationary pressures are persisting,” Zaccarelli said in emailed comments Thursday. The Federal Reserve “wants to see inflation start coming down in a persistent manner, but the market wants to see economic growth and corporate profits increasing, so if neither are headed in the right direction then that’s going to be bad news for markets,” he said.

As earning have been looking good, we maintain a cautious optimism about how we will finish in 2024 and will continue to seek value in Small/Mid-Caps, Foreign stocks, and moving to intermediate bonds as the Fed finally decides what they are going to do.

Mike