Action movies, especially those from earlier decades, often show a cataclysmic incident about to take place, only to be stopped at the last moment by the hero. These events sometimes border on the edge of preposterous and they often depict events that might greatly affect a large population, entire countries, or even the entire world order. In most action movies we know the good guys (or gals) come out on top, but we still feel tension and angst as we watch events unfold and near an actual crisis. Last week an agreement was reached on the debt ceiling and the media headlines called it a crisis averted, but in reality how close were we to a real crisis? Would the U.S. have defaulted on its debt, possibly sending financial markets into chaos?
The media hyped up the possibility of a default but in reality this was most likely just political theater by both parties since it would be in neither best interests to not reach an agreement. Even though it was not a surprise, the markets cheered the agreement and enjoyed a strong rally on Friday to cap off a positive week with the Dow, S&P 500, and Nasdaq all ending with weekly gains of about 2%. The small-cap Russell 2000, which recently had been negative on the year, performed even better with a gain of more than 3%. Friday’s rally was very broad based and included all sectors; a deviation from recent event where market returns have been predominantly driven by strength in the technology sector. On a year-to-date basis the Dow is up 2%, the S&P 500 has gained nearly 12%, and the tech-heavy Nasdaq is higher by a whopping 26%. Despite this rebound, the Nasdaq still sits some 17% off the all-time high reached in November, 2021 while the Dow and S&P are 7% and 10% off their highs, respectively. The same is true of many mutual funds and ETFs – some of this year’s highflyers were last years poorest performers and still have not recovered. This is a reminder of why protecting against downside risk is so important. When it comes to investing, slow and steady often wins the race.
Job Well Done
Monthly employment reports helped contribute to the market rally on Friday. The number of new jobs created was substantially higher than expected while the unemployment rate jumped considerably more than expected. The labor market seemingly remains robust with solid job growth but the uptick in the unemployment rate indicates that some weakness may be appearing. Given the conflicting data, analysts are split on the implications for the Federal Reserve at their upcoming meeting. Recent speeches from Fed officials had alluded toward another rate hike next week. Further fanning speculation of another rate hike was the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, surprising to the upside with a rise of 4.4% compared to a year ago. This was an acceleration from the 4.2% annual rate reported the previous month. This measure of inflation has fallen significantly since its recent high of 7% last June, but the fact this report did show an increase in year-over-year inflation from the previous month is likely somewhat concerning to the Fed, especially since it remains above the Fed’s target of 2% and shows that inflation not only remains persistent but also is deeply embedded.
As of now, it is unknown what action the Fed will take at their meeting next week, but what is certain is that a pause does not necessarily mean an end to the rate hikes. The Fed could simply pause to further assess economic conditions and then continue on their upward path. Markets are pricing in another quarter point rate hike in July and the market pricing for the December fed funds rate suggests there will not be any rate cuts by year-end. Regardless of what happens in coming weeks, it does seem we are nearing the end of the rate hike cycle, and given what has recently occurred with Treasury yields, we have probably already seen the peak in most interest rates. If you are waiting for higher rates or only investing in very short-term rates you might want to reconsider and lock in current interest rates for a little longer term.
This coming week will be very quiet in terms of economic releases and will be the “calm before the storm” with CPI, PPI and the Fed meeting the following week. Investors will be waiting to see if there will be follow-through to the surprise rally on Friday. Last week saw the biggest money inflow into technology stocks on record. These inflows, especially if continued, could provide some momentum going forward. Or if you are a contrarian, this might mean we have seen the short-term peak and it would be a good time to trim back. The recent Artificial Intelligence (A.I.) buzz in the markets has helped propel certain names higher but it does give question to how much higher these stocks can go in the short-term. The size of the A.I. market remains to be seen and over the longer-term would appear to be enormous, but one can’t help but think that maybe there is a bit of a bubble or mania in these stocks. This is probably not a time to be getting too greedy.
Long-time market advice about being a long-term investor and not trying to time the market has been reaffirmed with the recent rally. Those waiting on the sidelines have missed out but fortunately are most likely earning decent interest in cash or other short-term instruments for the first time in over 15 years. With a slowdown in economic indicators, it may seem the long-predicted recession could eventually come to fruition but there is also a likelihood that the worst of the market is in the rearview mirror. For those sitting in cash, there are still plenty of opportunities, but time might be running out. Avert your own crisis by planning ahead and having a solid long-term plan in place to ensure you feel secure in your retirement.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
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