Stocks Finish Higher on Growing Likelihood of Rate Cuts

Performance for Week Ending 8/23/2024:

The Dow Jones Industrial Average (Dow) added 1.27%, the Standard & Poor’s 500 Index (S&P 500) gained 1.45% and the Nasdaq Composite Index (NASDAQ) finished up 1.40%. Sector breadth was positive with 10 of the 11 S&P sector groups closing higher. The Real Estate sector (+3.63%) was the best performer followed by Materials (+2.39%) and Consumer Discretionary (+2.10%).

*See below for Index Definitions

MARKET OBSERVATIONS: 8/19/2024  – 8/23/2024

The S&P 500 finished higher for a second straight week after Fed Chair Powell, speaking at the Fed’s Jackson Hole conference, clearly signaled that a rate cut is coming at the September meeting, saying “the time has come for policy to adjust.” While Powell addressed the timing, he gave no hints to the magnitude of the cut and to how the Fed might proceed after its September gathering, saying that “the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” There has been an ongoing debate over whether the Fed should cut by 25 or 50 basis points (bps), and Powell’s speech did little provide clarity. According to CME FedWatch tool, a rate cut in September is all but a done deal, however, the futures are markets are signaling a 65.5% probability of a quarter-point rate cut and a 34.5% chance of a larger half-point rate reduction. Powell who has consistently stressed that rate decisions will be data dependent, probably doesn’t want to paint himself into a corner, especially with the all-important payroll data due out on September 6th.

Worries around the labor market have now surpassed inflation concerns, with Powell stressing that “we do not seek or welcome a further cooling in labor market conditions”, “we will do everything we can to support a strong labor market, and that “the current level of our policy rate gives us ample room to respond.” On inflation, Powell said that “progress toward our 2 percent objective has resumed,” “the upside risks to inflation have diminished,” and his “confidence has grown that inflation is on a sustainable path back to 2 percent.”

July FOMC Meeting Minutes Lean Dovish: According to the release of the minutes from the July 30-31 Fed meeting, several Fed officials acknowledged there was a plausible case for cutting interest rates at the July gathering, however the central bank’s policy committee voted unanimously to keep them steady. “Several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision,” according to the minutes. “The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”

Q2 Earnings – Winding Down: With about 95 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, 477 members of the S&P 500 have released results with 380 (79.8%) surprising to the upside. Aggregate earnings for this group are up a solid 9.4%. On the sector level the strongest growth has come from the Financials, Healthcare, 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 a report from the Bureau of Labor Statistics, US job growth was less robust in the year through March than previously reported. The data showed an estimate for total payroll employment between April 2023 and March 2024 was lowered by 818K. The data suggests employers added about 174K jobs per month during that period, down from the previously reported pace of about 242K jobs. While 174K is still a healthy pace of growth, it suggests that the labor market started to moderate much sooner than originally thought. Meanwhile, applications for unemployment benefits barely rose last week, indicating the labor market is moderating only gradually. Initial claims increased by 4K to 232K in the week ended Aug. 17. The four-week moving average, which smooths out some of the volatility, eased to 236K, the lowest in a month. On the housing front, the pace of US existing home sales rebounded 1.3% to a 3.95 million seasonally adjusted annual rate in July from 3.90 million in June after declining for four consecutive months. US manufacturing activity shrank early this month at the fastest pace this year on further weakness in production, orders, and factory employment. The S&P Global manufacturing purchasing managers index (PMI) slid 1.6 points to 48 (reading below 50 signal contraction). On a positive note, the report also showed services activity expanded at a solid pace to indicate underlying health in the largest part of the economy. Meanwhile, a measure of prices received by service providers declined to the lowest level since the start of the year.

The Week Ahead: Inflation and earnings results from A.I. bellwether Nvidia will be the focal points for the week ahead. On the inflation front, all eyes will be on Friday’s core PCE report – the Fed’s preferred measure of inflation. According to Bloomberg data, forecasters expect the July core gauge to hold steady at +0.2% on a month over month basis, while the year-over-year pace is expected to rise to +2.7%, a mild increase from the +2.6% level posted in June. Other notable data releases include durable goods orders on Monday, the Conference Board's consumer confidence index and the second release of the Q2 GDP data on Tuesday. Earnings season will continue to wind down with just 15 members of the S&P 500 expected to release results during the week. All eyes are expected to be on Wednesday’s update from Nvidia to gauge new data center growth and capital spending linked to A.I. On the Fed front, just three Fed Heads are scheduled to speak including Fed Governor Chris Waller on Wednesday.

— 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.