As indicated by the futures market, stocks look to begin this new trading day in a positive fashion. Shortly, investors will hear from Federal Reserve Chairman Jerome Powell on the economy and central bank policy. (Around the same time, the U.S. Census Bureau will release new home sales data for the month of July.) Year to date, domestic business activity, despite elevated inflation and interest rates, has proven quite resilient. This is particularly borne out in June-quarter corporate earnings results that were noticeably strong. That said, there have been signs of weakness in the jobs market, as indicated by a higher unemployment rate and revised-lower job additions. The services sector is expanding, but manufacturing remains sluggish.
On balance, business trends suggest the Fed can achieve a “soft landing” for the economy, avoiding a recession. It’s widely anticipated that central bank officials will approve at least a one-quarter-percentage-point cut to the federal funds rate, currently 5.25%-5.50%, at their upcoming September 17-18 meeting. Backing this assumption are the Federal Open Market Committee’s July meeting minutes highlighting the opinion, voiced by several members, that short-term interest rates ought to be reduced. Wall Street essentially assigns a 100% probability that rates will fall next month. A Fed move in September might well mark the beginning of a series of incremental cuts.
Fed officials will continue to monitor trends in business activity, inflation, and employment as they execute monetary policy. In the meantime, there are hints of a strengthening in the housing sector, most visibly in July’s existing home sales figures. Some market pundits say we could be on the cusp of a housing upturn. Historically, this sector has been a significant driver of the nation’s economic prosperity. One limiting factor, however, is the yet-unresolved single-family home supply/demand imbalance.
We believe that lower short-term interest rates will be supportive of stock valuations, particularly in the banking sector, assuming a steepening of the yield curve (i.e., short-term bond rates falling faster than long-term bond rates) which would lift interest-rate margins. A stock-market limitation, here, too, though, could be the challenge for corporations to sustain their very healthy net-profit growth rates of late. All in all, we believe the broader stock market can post decent share-price gains to the end of 2024.
In recent times, the major market indexes have been trading nearer their individual record levels. More specifically, the broad Standard & Poor’s 500 (S&P 500) is at a record, while the tech-heavy NASDAQ and blue-chip Dow Jones Industrial Average are inching toward their July peaks. Too, over the past couple of weeks, the Russell 2000 small-cap index has gathered renewed momentum. So far this year, both the S&P 500 and the NASDAQ are up roughly 17%, a strong showing, and the Dow has advanced a respectable 8.5%; the Russell 2000 has gained 6%. We advise diversifying across the major indexes, with an emphasis on well-heeled industry leaders. Additionally, holdings of high-quality bonds and interest-bearing cash instruments are good for ensuring favorable portfolio total returns, including generated income. – David M. 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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