Stocks Benefit from Solid Growth and Moderating Inflation

Performance for Week Ending 8/16/2024:

The Dow Jones Industrial Average (Dow) added 2.94%, the Standard & Poor’s 500 Index (S&P 500) gained 3.93% and the Nasdaq Composite Index (NASDAQ) finished up 5.29%. Sector breadth was positive with all 11 of the S&P sector groups closing higher. The Technology sector (+7.51%) was the best performer followed by Consumer Discretionary (+5.21%) and Financials (+3.22%).

*See below for Index Definitions

MARKET OBSERVATIONS: 8/12/2024  – 8/16/2024

The S&P 500 finished the week solidly higher, breaking its 4-week losing streak and posting its biggest weekly advance since early November. Driving the gains was data showing the economy remains on firm footing while inflation pressure continued to moderate. The data led to increased confidence that the Federal Reserve will be able to maneuver a “soft landing” scenario where inflation eases without pushing the economy into a recession. The resiliency of consumer spending was in focus with Labor Department data showing retail sales surged 1% in July, well above the 0.3% increase economists expected, and the biggest gain since the beginning of last year. In addition, retail bellwether Walmart posted better-than-expected second quarter earnings, while raising its full-year profit forecast. On a follow-up earnings call, the retail giant said that the American consumer is holding up fine. "So far, we aren't experiencing a weaker consumer overall," CEO Doug McMillon said on the call. The company’s CFO added, “We have not seen any incremental fraying of consumer health.”

Fedspeak – Starting to Lean Dovish: Atlanta Fed President Raphael Bostic, a voting member of the Fed's rate-setting committee, told the Financial Times that he is "open" to an interest rate cut in September. According to the report, Bostic warned that the Federal Reserve can't afford to be late in easing monetary policy following recent signs of a cooling jobs market. Separately, St. Louis Fed President Alberto Musalem said he believes the time is approaching when it will be appropriate for the US central bank to reduce interest rates. He said he now views inflation as back on a path toward the Fed’s 2% target and the labor market as no longer posing a risk to inflation. Chicago Fed President Austan Goolsbee said he is growing more concerned about the labor market than inflation amid recent progress on price pressures and disappointing jobs data. Goolsbee said current interest rates are “very restrictive” in an interview with Bloomberg News, a stance he said would only be appropriate if the economy were overheating. While a rate cut at the September Fed meeting seems like a foregone conclusion, the market is still debating between a 25 and 50 basis point (bps) move. While the odds (74.5%) favor a 25-bps move, the CME FedWatch tool shows futures markets are still discounting a 24.5% probability of a larger 50 bps cut.

Q2 Earnings – Winding Down: With over 90 percent of the S&P 500 members having already reported results, second quarter earnings season will come to an end in the weeks ahead. Through Friday, 463 members of the S&P 500 have released results with 365 (79%) surprising to the upside. Aggregate earnings for this group are up 8.5%. When all is said and done, consensus expectations compiled by Bloomberg forecast growth of 13% for the overall quarter. On the sector level the strongest growth has come from the Healthcare, Consumer Discretionary, and Utilities sectors. Full year expectations have remained rock solid with earnings expected to grow 9.5% in 2024 and 14.2% in 2025.

Economic Roundup: According to the Labor Department, underlying inflation eased for a fourth month on an annual basis in July. The so-called core consumer price index — which excludes food and energy costs — increased 3.2% in July from a year ago, still the slowest pace since early 2021. The monthly measure rose 0.2%, a slight pickup from June’s surprisingly low reading. Headline CPI also climbed 0.2% from the prior month and 2.9% from a year ago. The report showed prices for apparel, new and used cars and airfares all fell last month. Hospital services declined by the most on record and gasoline prices have been trending lower in recent months. Meanwhile, retail sales accelerated in July by the most since early 2023 in a broad advance that points to a resilient consumer, even in the face of high prices and borrowing costs. The value of retail purchases increased 1%, helped by a sharp snapback in car sales. On the housing front, mortgage refinancing activity surged last week by the most since the early days of the pandemic as borrowing costs continued to drift lower. The Mortgage Bankers Association’s refinancing index jumped 34.5% to a more than two-year high. Mortgage applications to purchase a home climbed 2.8%, the largest advance since the first week of June. The contract rate on a 30-year fixed mortgage eased 1 basis point to 6.54%, according to the Mortgage Bankers Association. Lastly, small-business optimism increased to a more than two-year high in July on a more optimistic outlook about the economy and sales. The National Federation of Independent Business optimism index rose 2.2 points to 93.7 — the fourth straight monthly advance, marking the longest streak since before the pandemic.

The Week Ahead: The Federal Reserve will be the focal point in the week ahead, with the Fed's annual Jackson Hole symposium titled "Reassessing the Effectiveness and Transmission of Monetary Policy" to be held on August 22-24. Investors will be looking for how recent economic data releases impact Fed official’s policy views ahead of the next central bank meeting on September 18. A speech by Fed Chair Powell on Friday at 10:00 a.m. EST will be the main event. Ahead of the meeting, the FOMC meeting minutes from July will be released on Wednesday. On the data front, the spotlight will be on Thursday’s S&P global manufacturing and services PMIs for August. Other reports of interest include existing home sales, jobless claims, and new home sales. Earnings season will continue to wind down with just 14 members of the S&P 500 expected to release results during the week. Amongst this group will be retailers Lowe’s, Target, and TJX Companies which are expected to provide additional color on the state of US consumption. Outside of the Jackson Hole meeting, three Fed Heads are scheduled to speak early in the week including Fed Governor Chris Waller on Monday.

— 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.