This morning brings a few important reports on the state of the U.S. economy and, in particular, the U.S. housing and residential construction markets. At 8:30 A.M. (EDT), the Commerce Department reported that housing starts and building permits for May came in at the annualized rate of 1.277 million and 1.386 million, respectively. Those figures were down sharply from the previous month and fell well short of consensus expectations. Investors also should be aware that the latest National Association of Home Builders/Wells Fargo Builder Sentiment Index came in at 43, down two points from the May reading and was at the lowest level since last December. This indicates more pessimism than optimism among builders. The ongoing elevated mortgage rates, which have hovered around the 7.00% mark for several months, are affecting housing affordability and that is of concern to the nation’s leading homebuilders.
We learned today from the Department of Labor that initial unemployment claims for the week ending June 15th totaled 238,000, which was down 5,000 from the previous week’s revised tally. The report does suggest some softening in the labor market, but still not at a level that is a major concern for the Federal Reserve, as it keeps interest rates sufficiently restrictive in an effort to tame inflation. In another release, the Federal Reserve Bank of Philadelphia reported that manufacturing activity in the greater Philadelphia area came in at 1.3 during the month of May, which was down from the April reading and below the consensus forecast of 4.9. The equity futures, which were modestly positive heading into the economic releases, are now presaging a mixed opening for the stock market when trading kicks off stateside, with some continued strength for the NASDAQ Composite and the S&P 500 Index. Treasury yields moved a bit higher on the economic data.
Investors return today (the market was closed yesterday in observance of the Juneteenth holiday) with the S&P 500 Index and the NASDAQ Composite right near the recently established record highs. The Dow Jones Industrial Average, which houses a number of cyclical large-cap companies, has trailed the two other indexes for much of the last fortnight of trading. Driving equities higher has been the artificial intelligence (AI) boom, which is especially powering the stocks of the semiconductor companies that produce the processing chips to run large-data models. This, along with a more-dovish outlook on monetary policy from Wall Street, is providing support for equities. While the Federal Reserve lowered its 2024 interest-rate cut projection from three reductions to one last week, the Street still believes that we will get at least two rate cuts from the central bank before year’s end. This dovish stance was fueled by weaker-than-expected May consumer and producer price growth, which was taken as a sign that inflation is continuing to ease.
Meanwhile, the small-cap stocks, which have lagged their large-cap brethren, year to date, have yet to join the bullish move that is taking place in the other equity sectors. The Federal Reserve’s current “high for longer” monetary policy stance and hawkish commentary from senior Fed officials, including Chairman Jerome Powell, continue to hurt the performance of stocks of the small-cap companies, which tend to be more interest-sensitive. On point, as we approach the final trading days of the first half of 2024, the small-cap Russell 2000 Index is relatively unchanged, year to date, while the Dow 30, the NASDAQ Composite, and the broader S&P 500 Index have recorded advances of 3.0%, 19.0%, and 15.0%, respectively. Perhaps, those investors who missed the big gains from S&P 500 and the NASDAQ Composite and are now willing to take on some risk, will give the small-cap stocks a closer look. This group also could get a nice boost later this year if and when the Federal Reserve pivots on the monetary policy front and begins cutting interest rates. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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