According to the futures market, stocks are headed for a positive open to today’s trading. Several new data points were released early this morning. The Bureau of Economic Analysis reported second-quarter 2024 gross domestic product growth of 2.8%, versus economists’ estimate of 2.0% and the first-quarter pace of 1.4%. Notably, inflation measures pointed to a further easing. Initial jobless claims, as measured by the U.S. Labor Department for the week ended July 20th, tallied 235,000, and on a par with the experts’ outlook and the prior-week level of 245,000 (revised up by 2,000). Additionally, the Census Bureau announced that June durable goods orders declined sharply, by 6.6%, worse than the expectation for a 0.3% gain and the 0.1% increase in May. Excluding the volatile transportation sector, however, the change in durable goods orders was a positive 0.5%; they had contracted 0.1% previously. Shipments showed favorable momentum.
The new data are in line with the widely held view on Wall Street that the domestic economy is headed for a “soft landing.” True, there are signs of slowing consumer spending, but it seems the economy can avoid a recession; at least a harsh one. Both the manufacturing and services sectors have lost some momentum. One of the most visible signs of a consumer pullback is declining restaurant receipts. Too, given elevated interest rates, housing demand seems to only be propped up by an ongoing shortage of homes available for sale. Fortunately, improved wages and a low unemployment rate have been positives for the economy.
At the end of this month, the Federal Open Market Committee will meet to fine tune its short-term interest rate policy. Some on Wall Street, seeing economic momentum throttling back, are hopeful of a rate cut of about 25 basis points. The federal funds rate currently stands at 5.25%-5.50%. The smart money is on a cut of the same magnitude in September. Optimists on the Street are anticipating a larger reduction of 50 basis points, or even more. We believe a one-quarter-point cut in September is most likely.
The major market indexes have displayed heightened volatility, thus far, this week. Aside from the general economic news, investors are closely monitoring the June-quarter earnings report season now under way. Notably, after Tuesday’s closing bell, Alphabet (GOOG) and Tesla (TSLA) released their latest operating results. Shares in Alphabet, the Internet-search and cloud-services company, fell in early Wednesday trading, with investors concerned about softer advertising growth at the YouTube arm and stepped-up spending on artificial intelligence initiatives. Tesla, the electric vehicle maker and technology company, posted weaker profitability than Wall Street expected. The electric auto market seems to be maturing and demand waning. A planned autonomous taxi rollout has been delayed by a couple of months. The company looks for its new low-cost, entry-level EV models to enter the marketplace in 2025, potentially giving future results a shot in the arm.
We would not be surprised to see continued higher share-price volatility in the coming weeks. The major market indexes have had a nice run this year, and investors are wondering if valuations have gotten excessive, especially those of the Magnificent 7 high-flyers. This week, it became more apparent that a sector rotation to value/cyclical issues from tech stocks is in progress. Broad weakness in the tech sector on Wednesday suggests the markets might be considering the possibility of an economic pullback, even as the Fed likely starts to take action on rates; a scenario we don’t anticipate. Also, political events, at home and abroad, are influencing share-price moves. In the meantime, investors should maintain ample holdings in top-quality large-cap equities, including those in the utilities, consumer staples, and energy sectors, which offer a good degree of stability during more uncertain times. – David Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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