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Week in Review
Equity Markets:
Momentum continues to push the markets higher, largely a combination of our recent robust earnings season as well as continued optimism around Artificial Intelligence. This is compounded by expectations that the Federal Reserve will cut interest rates this coming week.[1]
All three major markets hit new records last week, with the Dow Jones Industrial Average up 0.97%, the S&P 500 up 1.60%, and the Nasdaq gaining 2.05%.[2] Indeed, last week was the fifth positive week in the past six for the S&P 500. Recent momentum in Small Caps has heeled back, with the Russell 2000 Index up just 0.27% last week.
Fixed Income Markets:
Bond markets continue to gain while easing back on their rates of growth across the past four weeks of overall positivity. This was furthered with high expectations that the Federal Reserve will see interest rates cut later this week, a decision reflective of its dual mandate for maximum employment and overall price stability.
Yields on US Treasurys regained stability this past week, with the 10-year’s yield declining by just 1 basis point, marking the fourth week in a row it’s come down. Where it was 4.49% last July, it’s now hovering at 4.06%. And while the 2-year saw its yield rise by 5 basis points, the 30-year recognized a decline of 8 basis points. Positive gains were also recognized by Municipal Bonds and Investment-Grade Corporates.[3]
Economic:
Inflation remains a concerning issue for the US economy. The Consumer Price Index has risen to 2.9%, up from 2.7% last month, and is well in excess of the Federal Reserve’s target rate of 2.0%. And while the Producer Price Index did show a slight month/month decline in costs, a quick rise in initial unemployment claims indicated further economic weakness emerging.[4] Consumer Confidence also appears to be waning: the University of Michigan’s Survey of Consumers read at 55.4, its second consecutive monthly decline.
The US Supreme Court said it will hear the White House’s appeal to the recent ruling by the US Court of Appeals that found nearly two-thirds of President Donald Trump’s tariffs unconstitutional. They will do so on an expedited basis, with the hearing to take place this November.
Looking Ahead
Equity Markets:
Stocks continue to appreciate, stretching valuations even further. Currently, the Forward 12-Month Price/Earnings Ratio of the S&P 500 is 22.5, higher than its 5-year average of 19.9 and its 10-year average of 18.5.[5] The indication is that equities remain expensive. And should the Federal Reserve cut interest rates this week, that would likely lead to a further spark to forward price momentum.
The time is right for equity investors to revisit their financial plans and consider currently elevated prices. Opportunities could be present to recognize profits for those looking to memorialize certain gains, taken into consideration with one’s overall long-term objectives. Concurrently, risk tolerances should also be reviewed, as sudden volatility could be detrimental to continued market growth. Broad stock market growth is a great thing and should be celebrated; that said, no one wants to be among the last to leave a party.
Fixed Income Market:
Further declines in long-term yields continue to present new fixed income investments as increasingly attractive at current entry points. Such attractiveness could enhance over upcoming weeks, perhaps even quarters, as risk premiums may widen even more.
There remain multiple material downside risks to the broader economy that could overcome strong fundamentals. These include tariffs further compressing both consumer spending and new business fixed income investments. Such pricing concerns weigh heavily on both activity and sentiment. More concerning, we have not seen moderation in inflation.
Economic:
The Federal Open Market Committee meets this week, where it is largely anticipated it will cut the Key Rate (Fed Funds rate) by 25 basis points. That would bring interest rates down to 4.00%-4.25%. The CME Group’s FedWatch tool reflects 94% confidence that the FOMC will cut interest rates by a quarter point, with the remaining 6% of respondents anticipating a 50 basis point cut.[6]
Both Equity and Fixed Income Markets will react to the FOMC’s announcements accordingly. Perhaps the most significant move they can make is that they’re establishing a series of interest rate cuts through the rest of the year and beyond.
Sources:
1) John Hancock Investment Management, LLC
https://www.jhinvestments.com/weekly-market-recap#fund-industry-overview
2) JP Morgan Asset Management
3) Nuveen, LLC
4) US Department of Labor
https://www.dol.gov/ui/data.pdf
5) FactSet Research, Inc.
6) CME Group
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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