Equity Market Advances on Rising Rate Cut Probabilities

Performance for Week Ending 7/12/2024:

The Dow Jones Industrial Average (Dow) added 1.59%, the Standard & Poor’s 500 Index (S&P 500) gained 0.87% and the Nasdaq Composite Index (NASDAQ) finished up 0.25%. Sector breadth was positive with 10 of the 11 S&P sector groups closing higher. The Real Estate sector (+4.37%) was the best performer followed by Utilities (+3.90%) and Materials (+2.97%). On the downside, the Communications Services sector (-3.57%) was the sole loser.

*See below for Index Definitions

MARKET OBSERVATIONS: 7/8/2024  – 7/12/2024

The S&P 500 finished the week higher, the fifth gain in the past six weeks, as a continued deceleration in inflation coupled with the recent mixed labor market data, strengthened the case for the Federal Reserve to begin cutting interest rates in the months ahead. According to the Labor Department, consumer prices during June rose 3% on a year-over-year basis and fell 0.1% from the prior month, the first monthly decline since May 2020. New and used vehicle prices, services costs, and gasoline prices all fell. Core CPI—which excludes energy and food prices—rose by a slower-than-expected 0.1% from May and 3.3% from the same time last year. The better-than-expected inflation numbers and the recent rise in the unemployment rate reinforced the argument that the economy is cooling. At his semi-annual monetary policy testimony to Congress, Fed Chair Powell seemed to lower the bar for cutting rates by noting that officials are increasingly wary of potential risks to the labor market from high borrowing costs as they seek more evidence inflation is slowing down. When asked directly if he felt that the bar to cutting interest rates had been cleared, Powell said "I do have some confidence of that, but I am not ready to say that yet.” Powell told lawmakers he felt the U.S. was still heading towards a so-called soft landing where the Fed's inflation target is met without a punishing rise in the unemployment rate. "There is a path to getting back to full price stability while keeping the unemployment rate low," Powell said. "We're on it. We're very focused on staying on that path." According to Bloomberg’s World Interest Rate Probability tool, the odds of a 25-basis point (bp) rate cut at the September FOMC meeting jumped to 94.5% from 75%, a week prior. The data also shows the market pricing in a second 25bp cut at the December Fed meeting.

Fedspeak: Fed Governor Lisa Cook said although soft landings in economies after bouts of high inflation are rare, that's what she is predicting for the US economy as inflation cools with little damage to the labor market. "My baseline forecast is that inflation will continue to move toward target over time, without much further rise in unemployment," Cook said. Chicago Fed President Austan Goolsbee described the latest inflation data as “excellent,” adding the figures provided the evidence he’s been waiting for to be confident the central bank is on a path to its 2% goal. Goolsbee declined to offer guidance on the timing of the first interest-rate cut but emphasized the importance of the deceleration in shelter inflation in recent months, calling it “profoundly encouraging.” San Francisco Fed President Mary Daly said given recent data on employment and inflation, some adjustment to interest rates will likely be warranted-though she stopped short of offering a specific timeline for cuts. "At this point, it is clear that the risk to our mandated goals of price stability and full employment have come into better balance and that monetary policy is working," Daly told reporters Thursday on a conference call after the release of June data on consumer prices. St. Louis Fed President Alberto Musalem said recent data — including consumer price data out Thursday — suggest the central bank is making further progress toward its 2% inflation goal, but noted additional evidence is needed. Musalem described the labor market as “strong,” and said the central bank has time to evaluate more data before deciding about adjusting policy. He said the Fed’s current policy stance is “restrictive” but not overly so.

Q2 Earnings – So Far, So Good: While it’s still too early to draw any conclusions, second quarter earnings season is off to a solid start. Through Friday, 26 members of the S&P 500 have released results with 80% surprising to the upside. Aggregate earnings for this group are up 8.8%. When all is said and done, consensus expectations compiled by Bloomberg forecast growth of 9.3% for the overall quarter. Full year expectations also continue to creep higher with earnings expected to grow 9.5% in 2024 and 14.0% in 2025. Earnings season will shift into high gear over the next two weeks when 184 members of the S&P are scheduled to report – stay tuned!

Economic Roundup: Small-business optimism increased for a third straight month in June to the highest level this year as firms became less downbeat about the economy’s prospects. The NFIB sentiment index advanced 1 point to 91.5 last month. While still pessimistic about the outlook for business conditions, the share of firms expecting the economy to worsen is the smallest in three years, although the overall sentiment index remains well below pre-pandemic levels. Mortgage rates in the US dropped for the fifth time in six weeks. The average for a 30-year fixed rate mortgage was 6.89% down from 6.95% last week, according to Freddie Mac. On the labor front, initial jobless claims in the week ended July 6 fell 17K to 222K. The 4-week moving average—which helps smooth week-to-week volatility—fell to 233.5K from 238.75K in the prior week

The Week Ahead: It will be a busy week on the data front, with Tuesday’s Retail Sales report for June being the focal point. According to Blomberg, retail sales are expected to fall 0.2%, although the so-called control group—which goes into the calculation for gross domestic product (GDP)—is expected to rise by 0.2%. The control group excludes food services, auto dealers, building materials sales and gasoline stations. Other economic reports of interest include the Empire Manufacturing Index, Building Permits/Housing Starts, Industrial Production, Initial Jobless Claims, and the Leading Economic Indicators Index. On the Fed front, investors will keep an eye on Fed Chair Powell's interview with David Rubenstein on Monday and a speech by Fed Governor Chris Waller on Wednesday. The Fed’s Beige Book report will also be released on Wednesday. Second quarter earnings season will begin to ramp up with 45 members of the S&P 500 expected to release results during the week. Amongst this group will be 5 members of the Dow Jones Industrial Average. On the political front, the focus will be on the Republican National Convention in Milwaukee (July 15-18), where the party's nominees for president and vice president will be formally chosen.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.