Published November 8, 2024

October 2024 delivered a complex blend of economic signals that tested market resilience. The S&P 500’s decline of roughly 1.0% for the month masked significant underlying crosscurrents, as investors processed natural disasters, labor disruptions, and pre-election uncertainty amid shifting monetary policy expectations.

The headline grabber was October’s surprisingly weak jobs report, showing only 12,000 positions added – a dramatic drop from September’s revised 223,000 gain. This apparent weakness was most likely due to temporary disruptions from Hurricanes Helene and Milton, along with the Boeing machinists’ strike affecting 33,000 workers directly and thousands more through supply chain impacts. Stripping out these transitory effects suggests underlying job growth remained in the healthy 100,000-150,000 monthly range. The unemployment rate held steady at 4.1%, while wage growth ticked up to 4.0% year-over-year, indicating continued labor market resilience beneath the headline volatility.

The economy’s fundamental strength was further evidenced by third-quarter GDP growth of 2.8%, powered by robust consumer spending and government expenditure. While this marked a slight moderation from Q2’s 3.0% pace, it reinforced America’s remarkable economic outperformance. Since early 2020, U.S. real economic growth has reached 10%, tripling the average of other G7 nations. This divergence reflects not only increased fiscal stimulus spending, outpacing that of other developed countries, but also deep-seated advantages in productivity and innovation – the average American worker now generates approximately $171,000 in annual economic output, far exceeding the $120,000 in the eurozone, $118,000 in Britain, and $96,000 in Japan, as reported in The Economist.

Inflation continued its uneven decline, with September’s CPI registering a 2.4% annual increase, down from 2.5% in August but above expectations of 2.3%. Core inflation proved especially stubborn at […]

Published October 11, 2024

As leaves began their annual transformation in autumn, the stock market defied its usual seasonality. September has historically been a challenging month for U.S. stocks — often the worst of the year — but not this time. This year, September provided noteworthy market returns, spurred by the Federal Reserve’s 50-basis-point rate cut, resulting in a resurgence in stock market optimism. Year to date, through the end of September, the S&P delivered its best return since 1997, with an increase just shy of 21 percent.

On Sept. 18, the Federal Reserve, led by Chairman Jerome Powell, lowered the federal funds rate by 0.50 percent to a range of 4.75 percent to 5 percent. This larger-than-expected cut was described by Powell as “recalibrating policy down over time to a more neutral level.” In other words, the Fed lowered rates not because the economy needs a boost but rather quite the contrary. Powell explained that the cut is because rates are just too high, not because of weakness in the economy. This reassurance fueled the market bounce. The decision also reflects the Fed’s growing confidence in the progress made to tamp down inflation, which has eased from a peak in June 2022 of nearly 7 percent for the PCE to an estimated 2.2 percent as of August, according to the latest PCE data released on Sept. 27. It’s a sign of the “soft landing” many people hope for.

The market’s reaction to the Fed action and Powell’s words was overwhelmingly positive. The day after the announcement, the Dow Jones Industrial Average surpassed 42,000 points for the first time, while the S&P 500 and Nasdaq Composite also reached […]

Published September 6, 2024

August 2024 began with a jolt as financial markets grappled with the sudden unwinding of the now widely known “yen carry trade.” This strategy, where investors borrow in low-interest-rate currencies like the Japanese yen to invest in higher-yielding assets elsewhere in the world, had become increasingly prevalent due to Japan’s ultra-low interest rates basically providing “free” money. However, as the Bank of Japan raised rates and the gap between U.S. and Japanese government bond yields narrowed, this trade began to unravel spectacularly.

The rush to cover positions led to a surge in the yen and forced selling across various asset classes, contributing to significant market instability in the early days of the month. The Nikkei, Japan’s market benchmark, declined 27 percent from its July top.

This event served as a stark reminder of the interconnectedness of global markets and the potential ripple effects of leveraged trading strategies. It underscored the need to understand and manage risk in investment portfolios, particularly when it comes to complex strategies involving currency markets. Moreover, it reminded individual investors of the value in staying calm during such market disruptions, as these events often prove temporary.

Despite the early month turbulence, major U.S. stock indexes managed to close August with noteworthy gains. The S&P 500 finished up 2.3 percent for the month, the Dow Jones Industrial Average rose 1.8 percent and the tech-heavy Nasdaq Composite ticked up 0.6 percent. FactSet reported S&P earnings for the second quarter of 2024 up 10.9 percent, which would be the highest year-over-year increase since Q4 2021. Strong earnings reports and positive guidance from many companies in diverse sectors and recurring signs of a resilient consumer […]

Published July 3, 2024

June closed a remarkable first half of 2024 for the U.S. stock market, driven by an unrelenting fervor for AI investments. The S&P 500 climbed an impressive 14 percent year-to-date, propelled by gains in technology giants and AI-related stocks. Nvidia has been at the forefront of this surge, with its shares skyrocketing 149 percent so far this year. Nvidia briefly became the most valuable public company globally, with a market cap surpassing $3 trillion. Other major tech players, including Alphabet, Apple, Microsoft, Meta, and Amazon have likewise seen substantial gains, and these six stocks now represent over 30 percent of the S&P 500 index. The outsize performance of these AI-driven stocks highlights a potential vulnerability in the current rally in that the overall market’s strength is heavily reliant on a narrow group of top-performing companies.

Inflation remains a critical factor in market sentiment. The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose by a modest 2.6 percent in May from 12 months previous, marking the lowest year-over-year increase since 2021. This encouraging data suggests that price pressures may be moderating, potentially paving the way for the Fed to ease interest rates later this year. Gross domestic product expanded at a 1.4 percent annualized rate in the first quarter of 2024, a slight uptick from the previous estimate.

According to the Consumer Confidence Index, consumer confidence dipped slightly in June, indicating that while consumers’ assessments of the current business and labor market conditions improved, their outlooks weakened. This mixed sentiment highlights the delicate balance between the strength of the current economy and concerns about the future and an overstretched consumer.

Despite […]

Published August 9, 2024

July brought a cooling breeze to the red-hot rally that defined the first half of 2024. The S&P 500’s modest 1 percent gain in the month contrasted sharply with its blistering 14.5 percent advance during the first six months, when it set roughly three dozen record highs. This deceleration stemmed largely from a rotation from large-cap to small-cap stocks, blunting the market’s earlier momentum.

The Dow Jones Industrial Average outpaced its peers with a 4 percent increase, while the tech-heavy Nasdaq Composite dipped slightly. This divergence highlighted the month’s key theme: a shift from AI-driven tech giants to lagging sectors such as industrials and to smaller companies.

The Federal Reserve’s actions played a pivotal role in shaping market sentiment. While the decision to hold interest rates steady at the July 31 meeting was widely anticipated, investors scrutinized Fed Chair Jerome Powell’s press conference for future policy clues. Encouraging inflation data, coupled with a cooling yet resilient labor market, fueled expectations of potential rate cuts as early as September. The PCE price index rose by 2.5 percent year over year in June, edging closer to the Fed’s 2 percent target, bolstering hopes for a “soft landing” scenario.

Markets reacted sharply in the days following the Fed meeting in July. The Dow Jones Industrial Average fell more than 600 points in a single day, reflecting investors’ disappointment that the Fed hadn’t moved more decisively toward rate cuts. This negative sentiment was compounded by a weaker-than-expected jobs report on Aug. 2, showing only 114,000 jobs added in July and unemployment ticking up to 4.3 percent. While supporting the case for future rate cuts, this data also stoked fears […]

Published Jun 7, 2024

This was not the May to follow the conventional wisdom of “Sell in May and go away.” The ongoing news about the power of generative artificial intelligence (AI) to disrupt so many aspects of the work and leisure worlds fueled continuing optimism among traders and investors who had been sitting on the sidelines, hoping for a pullback.

The Dow closed out the month with a monstrous, late-day rally, rising almost 575 points, or 1.5 percent, for its best day of 2024. This move reversed the drop on May 23 of 600 points, or more than 1.5 percent, on the Dow’s worst day since March 2023. This decline in 2024 was primarily due to a 7.6 percent drop in Boeing (BA) shares following an announcement of delayed plane deliveries.

Despite the eleventh-hour gains on Friday, fueled by the release of key inflation data that reassuringly met expectations, all three indexes lost ground over the week. The Nasdaq fell 1.1 percent on the week, snapping a five-week streak of gains. The Dow and S&P 500 lost 1 percent and 0.5 percent, respectively. Yet the month remained a good one for all the indexes, with gains of 2.3 percent for the Dow, representing almost all its gains for the year, 4.8 percent for the S&P, and 6.9 percent for the Nasdaq. Year to date as of month end, the Dow was up 2.64 percent, the S&P 10.64 percent, and the Nasdaq 11.48 percent. On May 17, the Dow closed above 40,000 for the first time ever; but it ended the month at 38,686.

Stocks slid from record levels as interest rate worries dominated investor sentiment after blockbuster earnings […]

Published April 5, 2024

The U.S. stock market officially entered bull market territory in the first quarter: a 20 percent increase in the S&P 500 from its previous low. By that measure, and according to the S&P Dow Jones indices, the current bull market began on Jan. 19, 2024.

The S&P was up 10.2 percent for the first quarter of 2024 and closed at record highs 22 times during that period – the most since the first quarter of 1998. The Nasdaq rose 9.1 percent and reached record highs three times. The Dow Jones average was up 5.6 percent, with 17 record highs, and was closed in on crossing the 40,000 threshold for the first time. More good news for bulls: of the 16 times the S&P 500 has risen 8 percent or more in the first quarter from 1950 through 2023, only once did the index lose ground for the remainder of the year. That equates to the market having risen 94 percent of the time in years with such powerful first-quarter gains.

Robust economic indicators and company earnings reports are fueling the stock market rally. U.S. gross domestic product (GDP) grew at 3.2 percent in the fourth quarter of 2023. For a developed economy, annual GDP growth is expected to be 2-3 percent. The tendency of stocks in the same sectors to move in the same direction has fallen to low levels, and the equal-weight S&P held its own against the market capitalization S&P. This means that individual company performance is having the most impact on share prices, as the market broadens out from being driven only by AI news. It also means that the indexes […]

Published March 11, 2024

As companies reported earnings in February, evidence of the broad acceptance and monetization of AI tools powered stocks to new record highs.

The Dow Jones was up 2.2 percent, reaching an all-time high of 39,131.53 on Feb. 23. The NASDAQ Composite ended the month at a closing record high of 18004.87, up 6.2 percent on the month and 8 percent for the year, fueled by three of its largest constituents: Nvidia, Amazon and Alphabet (Google). The S&P 500 also reached new highs, rising 5.2 percent in February and 6.8 percent year to date, surpassing 5,100. As of this writing, the S&P 500 has achieved 15 new highs since the beginning of the year.

History says February is a terrible month for the market, so what happened?

On Feb. 21, AI chip maker Nvidia reported Q4 2023 earnings which handily beat analyst estimates and, more importantly, gave positive guidance for continued strong growth in 2024. As of the end of February, Nvidia stock was up over 25 percent on the month, 60 percent for the year-to-date and 249 percent for the trailing 12 months.

The day after reporting earnings, the chipmaker added $277 billion to its stock market valuation, the largest daily gain ever achieved by a single company. Its market capitalization reached $2 trillion. The AI halo effect spread to other technology stocks and then to the market as a whole, underscoring the adage that “a rising tide raises all boats, even the leaky ones.”

Economic data released in February reflected the ongoing balance between inflationary pressures, employment and the underlying strength of the U.S. economy. The CPI, which measures the average change over time in the […]

Published February 9, 2024

Stocks rose for a third straight month in January. The S&P 500 advanced 1.6 percent between Dec. 29 and Jan. 31. At one point it was up as much as 3.4 percent but fell sharply to end the month. The Nasdaq-100 and Dow Jones Industrial Average also climbed, with all three benchmarks achieving new highs.

Technology stocks still dominated, surging to new records as news about widespread adoption of AI tools permeated company results. Microsoft edged ahead of Apple as the world’s most valuable company. In January, Microsoft traded above its 2023 highs, while Apple traded slightly below its all-time high reached in December. The market rally did not broaden out across other sectors, as many market pundits had been predicting.

Most economic news was stronger than expected, including job growth, gross domestic product (GDP) and retail sales. This was on top of inflation numbers continuing to moderate. Corporate earnings reports were robust. All this is positive for sentiment in the longer run and certainly for stocks, yet it gives the Federal Reserve less reason to cut interest rates. The realization that a rate cut is unlikely to happen in March contributed to the market pullback in late January.

The January jobs market report was an unexpected blowout, with an expansion of 353,000 – twice what economists had predicted. Unemployment remained stable at 3.7 percent, staying below 4 percent for 26 months now. January’s seasonal drop in employment was the smallest since 2012, except for 2021 and 2023.

Consumer delinquency rates have normalized. All this allays fears that the consumer, 70 percent of the U.S. economy, is overstretched and will not continue to spend. However, there […]

Published January 11, 2024

For much of 2023, economists continued to be doubtful that the Federal Reserve could achieve a reduction in inflation by reducing the money supply and raising interest rates without strangling growth in jobs and the economy. Many analysts were predicting a market sell-off as a result. But in November, the bond market began to sniff out the Fed’s success at tightening without sending the economy into a tailspin. The Goldilocks soft landing of not too little, not too much, but just right, was in sight.

Anticipating that the Fed would at last be able to loosen monetary policy, the 10-year Treasury slipped below 4 percent and the markets took off like a rocket for a much-desired year-end Santa Claus rally culminating in a nine-week win streak. The Dow Jones Industrial Average closed out the year up 16.2 percent, the S&P 500 finished up 26.3 percent, and the tech-heavy Nasdaq climbed 43 percent for one of its best performances in two decades.

Tech stocks were led by chipmaker Nvidia and Facebook parent Meta, as investors became more and more confident of the disruptively positive impact of AI. Many consider AI tools to be as strong an economic driver as the advent of the internet and have bid up prices of the related stocks accordingly. As the month progressed, the rally broadened to other overlooked sectors, and analysts believe this trend will continue into 2024. The Nasdaq is now just 6.5 percent below the record high it reached in November 2021.

Lael Brainard, former Fed vice chair and current director of the National Economic Council, maintains that the U.S. economy is strong. Employment is up significantly, unemployment […]