This week it has seemed that stocks are trying to claw their way back from a rough start. The futures market, however, points to a negative open to today’s trading. If modest positive momentum can be reattained through the day, it’s possible that the major market indexes, specifically, the NASDAQ, Standard & Poor’s 500, and Dow Jones Industrial Average, can finish this week on the plus side. Somewhat surprising, the Russell 2000 small-capitalization index may stay firmly in the red, tarnishing its recent popularity. Prior to the opening bell, there were no critical data releases scheduled.
To recap, stocks struggled on Monday, as an indirect result, we believe, of last week’s surprise increase in interest rates by Japan Central Bank.
Not unrelated, the previously favored Magnificent 7 tech stocks were sold, given investment-bank margin calls. We believe technical factors in trading, not last week’s soft employment reports, were behind the volatility in the big technology stocks.
Lending support to stocks, as this week wore on, were a better-than-expected Institute for Supply Management report on the services sector, indicating resumed expansion, a decline in initial jobless claims, and a further build of wholesale inventories. Too, despite some disappointments on the part of the tech sector leaders, the June-quarter earnings season is shaping up to be a fairly good one. Importantly, the latest economic data does not portend any shift in the Federal Reserve’s apparent inclination to reduce short-term interest rates, starting this September.
Indeed, the central bank looks set to cut the federal funds rate, now 5.25%-5.50%, by at least 25 basis points next month. Many on Wall Street, citing a slowing employment sector and pockets of weak business activity, are anticipating several cuts through yearend, including a possible initial one-half-point reduction. Regardless of what the Street thinks, we believe the Fed will be methodical in its strategy, carefully weighing incoming economic data points before reacting. At this time, it appears the Fed stands a decent chance of executing a “soft landing” for the economy, i.e., avoiding a recession.
Notably, next week, significant reports are on tap. Namely, releases on the Producer Price Index, the Consumer Price Index, retail sales, manufacturing, consumer sentiment, and the health of the housing market. Each release has the potential to move the markets, should there be any big surprises. The Chicago Board Options Exchange volatility index, also known as the VIX, has settled down to around 24, from its severe spike to 65 on Monday. Still, the current level is above the historical 20-year average range of 20-22. We would not be surprised to see elevated share-price swings over the near term.
We anticipate that the major market indexes will gain incremental ground to the end of 2024. Even so, that, of course, is not assured. Thus, investors would do well to sustain diversified portfolios, with substantial holdings in well-heeled large cap issues and high-quality bonds, supplemented by more-modest exposure to mid- and small-cap stocks. Cash reserves, held by those with a long view, should probably be put to work on any further sizable market pullbacks. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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