August 19, 2024

“Rule #1: Don’t lose money. Rule #2: Don’t forget Rule #1.”

Warren Buffett

What a week! Here are the numbers. The S&P 500 rose 3.93%, the Dow Jones Industrial average joined the party up 3.31%, The Nasdaq rocketed back 5.07%, erasing all of August loses. Internationally, the FTSE 100 gained 1.75% and the MSCI-EAFE recovered 2.95%. The 2 -year treasury closed with a yield of 4.054% and the 10-year paid 3.888%

U.S. stocks closed higher Friday to book their best weekly advance since November.

Strong retail-sales data last Thursday helped offset concerns about areas of potential weakness in the U.S. economy. The rally had stocks back in the neighborhood of record territory.

As Market Watch reported, Wall Street professionals said strong economic data last week helped to rebut investors’ fears about a looming U.S. recession while also boosting the likelihood of a 25-basis-point interest-rate cut by the Federal Reserve next month.

Inflation data released last week showed price pressures have continued to ease, while the latest batch of reports released last Thursday helped ameliorate concerns that a slowing labor market and fading U.S. consumer would lead the economy into a recession. Retail sales in the U.S. last month saw their biggest jump in a year and a half, while weekly jobless-claims data revealed that fewer Americans had applied for unemployment benefits than economists had expected. (Initial jobless claims fell by 7,000 to 227,000 in the week that ended Aug. 10, the Labor Department said last Thursday.) It is the lowest level since early July. As I indicted last week, Walmart reported earning will indicate where consumer spending is at.

Well, strong earnings from Walmart Inc. helped to spark a broad-based rally that’s seen consumer-facing names perform particularly well — with the S&P 500’s consumer-discretionary sector last Thursday tallying its best day of the year, according to Dow Jones Market Data. Additionally, the University of Michigan’s gauge of consumer sentiment rose to 67.8 in a preliminary August reading, up from 66.4 in the prior month. It is the first gain after four months of declines. Economists polled by the Wall Street Journal had expected an August reading of 66.6

On to the Fed! We will be watching as Federal Reserve Chair Jerome Powell comments during this week’s economic summit in Jackson Hole, Wyo. The expectation that the Federal Reserve is finally ready to begin cutting rates. That assumption will be put to the test next week when Fed Chairman Jerome Powell gives his annual address at the Fed’s symposium. “Expect Powell to reiterate that the Fed’s decisions are data-dependent, while confirming Fed officials’ dovish stance.” An expected rate cut by the Federal Reserve in mid-September won’t change the price of eggs or businesses’ hiring plans overnight, but it will signal the start of the next phase of the monetary-policy cycle, with important consequences for the economy, financial markets, and consumers,” Nicholas Jasinski writes in Barron’s latest cover story last Friday.

Earning also looks good which helped fuel last week’s rally, the numbers there are solid. Second-quarter profit growth for the S&P 500 is now expected to come in at 12.5% year over year, according to data from LSEG I/B/E/S. That’s with roughly 93% of the index’s components having delivered results.

And the bond market? Government bonds are making a comeback in 2024 after a years-long bear market resulted in the longest stretch of price declines in recent memory. But Andrea Cicione, head of research at TSLombard, cautioned that investors shouldn’t get too excited. Those who didn’t buy bonds earlier this summer may have already missed much of the rally, he said. (As we did) Bond yields fall as prices rise, and vice versa. Yields have fallen as investors have rushed to price in aggressive interest-rate cuts by the Federal Reserve, spurred by signs of slowing inflation and worries about the state of the U.S. economy and job market. However, history suggests that investors may have been too eager to bet on sharply lower rates, meaning the scope for further declines for yields could be more limited — unless a recession arrives, Cicione said in a report shared with MarketWatch on last Wednesday.

Barron’s Megan Leonhardt asks if inflation is tamed? “The pace of inflation managed to dip below 3% in July for the first time since 2021. The monthly measure of the consumer price index hit a rate of 2.9% year over year, the smallest 12-month increase since March 2021. It was slightly below economists’ forecast that overall inflation would hold steady at June’s 3% pace.  Headline inflation was 0.2% on a monthly basis in July, in line with expectations, though an acceleration from the surprising monthly decline of 0.1% in June. Core CPI, which excludes more volatile food and energy costs, was also in line with expectations, slowing slightly to a 3.2% year-over-year pace in July from the 3.3% level recorded in June. Core inflation hit 0.2% on a monthly basis as well, in line with expectations, partly because of anticipated declines in used car prices and airfares. Services inflation — shelter costs, in particular — ticked up markedly last month. That datapoint could push Federal Reserve officials toward making just a 25 basis-point cut in September, rather than the 50 basis-point cut that traders have recently been betting on.” Again, this week the Federal Reserve Chairman’s remarks should give us some idea where they are on rate cuts.

On the real estate front, Market Watch reports “Construction of new homes fell 6.8% in July compared with the previous month, as builders scaled back new projects. Housing starts fell to a 1.24 million annual pace from 1.33 million in June, the government said Friday. That’s how many houses would be built over an entire year if construction were to continue at the same rate each month as in July. The data fell short of Wall Street’s expectations of a 1.34 million pace. All numbers are seasonally adjusted. Housing starts fell to the lowest level since May 2020. Outside of the pandemic, new-home construction was at its lowest level since March 2019. The pace of construction has been trending lower in recent months as builders grapple with higher financing costs to build, as well as elevated mortgage rates that have dampened home-buying activity.”

On final development, last Saturday the Real Estate industry implemented new court ordered methods for determining the sales commission to be paid on residential real estate transaction. Needless to say, it has gotten a bit more complicated than the familiar 5-6% standard commission paid to a negotiated rate between seller and buyer and their agents. Point being, if you are looking to buy or sell the game has changed and make sure you know what you are doing when you negotiate your commission rate.

This week the Democratic National Convention begins in Chicago, any fireworks or civil unrest may give the markets pause after such a good week, just remember this too will pass.

Mike