July 15, 2024

“God Bless America” 

In the everyday hustle and bustle of our lives a moment comes that forces us to take stock of what is really important.  This weekend, I hope and pray that this was one of those moments. We must all remember that words and actions have consequences that can affect so many lives. Regardless of your personal political opinions, all should be horrified by the assassination attempt, the loss of an innocent life, the serious wounding of our fellow Americans, and, but for the grace of God, a calamity that could have caused irreparable harm to our nation and come to realize that our common bond must allow civility and respect in our political discourse to win the day.

Last week, was a good week in the markets, U.S. stocks finished higher Friday after paring gains in the final stretch of trading, with all three major indexes rising for the week. Last Friday, the Dow Jones Industrial Average came close to notching a new record high, as it reclaimed 40,000. The Dow rose 247.15 points, or 0.6%, to close at 40,000.90. The S&P 500 gained 30.81 points, or 0.6%, to finish at 5,615.35. The Nasdaq Composite climbed 115.04 points, 0.6%, to end at 18,398.45.  The numbers for the week: The S & P 500 gained .76%, the big winner was the Dow Jones Industrial Average up 1.55%, the Nasdaq brought up the rear adding .14%. Internationally, the FTSE 100 gained .60% and the MSCI-EAFE added .29%. The 2-year treasury fell to a closing yield of 4.455% and the 10- year followed to close at 4.185%.

Second-quarter earnings season got off to an inauspicious start today, with decidedly mixed results from several of the nation’s largest banks. It was a good quarter for investment banking.

What’s happening with inflation? The Federal Reserve’s preferred PCE inflation barometer showed a very small increase in prices in June, based on the details of the consumer and producer price indexes. The PCE is what the Fed uses as its inflation guidepost when it decides to change interest rates. The so-called core PCE, which omits food and energy, rose 0.1% and in June, however US Retail CPI fell 01%. Before the CPI report, the consensus forecast appeared to be around 0.2%. The story of inflation for the past few years is the same: The cost of goods is either flat or falling, but the cost of services are rising. The same pattern repeated itself at the wholesale level in June. The cost of goods — gas, electronics, appliances – dropped by 0.5% in June. They have now fallen in four of the first six months of 2024. The cost of services, however, jumped 0.6% in June following sizable increases in the prior two months. The Consumer Price Index report showed that inflation is cooling faster than expected. It was up 3.0% year over year in June, less than economists’ 3.1% forecast. Prices actually fell from May to June, the first month-over-month decline since May 2020.

However, Consumers’ optimism about the economy fell to an eight-month low in July over frustration with high prices, (a cumulative effect) even though they expect inflation to slow over the next year. The first reading of the consumer sentiment index in July dropped to 66.0 in July from 68.2 in June, the University of Michigan said last Friday. It was the fourth decline in a row and the weakest reading since November.

It all puts a rate cut from the Federal Reserve very much back in the picture, with traders now almost universally expecting a quarter-point rate cut by Fed’s September meeting. That’s the kind of certainty investors have been waiting for since the Fed paused its rate hikes nearly a year ago. The market will continue thinking about interest rates until the Fed finally starts to cut. The next Fed interest-rate decision is due on July 31. Almost no one is expecting a move then—the Sept. 18 meeting is when most expect some action. But if we get more signs of slowing growth from retail sales and jobs data this week, a surprise early cut shouldn’t be ruled out. That would provide even more momentum for this bull rally. A September cut by the Fed will continue a wave of cuts by major central banks, translating into a large injection of liquidity into the global banking system, which historically has led to rallies for both stocks and bonds

On the jobs front, Market Watch reports, Initial jobless claims fell by 17,000 to a total of 222,000 in the week ending July 6, the Labor Department said Thursday.  It is the lowest level since late May. The number of people already collecting jobless benefits in the week that ended June 29 fell by 4,000 to 1.85 million. The surprising drop in claims will stem some fears about a weakening economy. While Federal Reserve Chair Jerome Powell said earlier last week that the labor market has “cooled considerably,” there have been few signs of a pickup in layoffs. The unexpected decline in inflation in June might be too good to be true, but slower increases in the cost of rent and shelter could be a big deal.

And housing?  Over the past few years, the cost of shelter has been one of been the biggest sources of U.S. inflation. It’s the largest expense for most families and accounts for about 36% of the entire consumer price index. But recent data suggests home price inflation has calmed down. Economists and Federal Reserve officials have been banking on a slowdown in shelter costs because rents are no longer rising very rapidly. Yet because of the peculiar way rents are calculated in the CPI, big changes in the catchall shelter category can take up to a year to show up. That appears to be what is happening, Market Watch observed.

Even as the major indexes continue to notch big wins, the market has left small-cap stocks behind. That’s been the case for a while, with small caps underperforming large caps seven of the past eight years. So far this year, they’ve gained just 3%, compared with large caps’ gain of around 20%. Still, a small number of small-cap funds have outpaced the market. Treasury yields closed at their lowest levels in more than three months on Thursday, driven by a rally in U.S. government debt following the release of June’s CPI data. As such, we still think small caps will be the place to make a good bet going forward. Along with intermediate term quality bonds.

One final thought, as difficult as I find it to write these words, our opinion about the “smart money” pricing in a Trump victory, in light of what just happened I shudder to trivialize that shocking and serious event with further proof of our supposition being true. Having said that, many are now joining that analysis and the betting markets showed a further rise in the probability of a Trump victory after the former president was hit in the ear by a bullet at the Saturday rally outside Pittsburgh. Stock-market gains in 2024 have shown a correlation with Trump’s perceived probability of victory, and betting markets reflected a further increase in those prospects following the shooting. So-called Trump trades based on expected implications of extended tax cuts, higher tariffs and aggressive deregulation have benefited.

Again, if you are of religious faith, please pray for our country at his perilous time.

Mike