The futures market points to a mixed open to today’s trading. There are no significant economic releases scheduled. Stocks appear on track to post gains for this week. Through Thursday’s close, the tech-weighted NASDAQ composite had advanced 1.9%, while the broader Standard & Poor’s 500 (S&P 500) index and the blue-chip Dow Jones Industrial Average were both up about 1.6%. Impressively, the Russell 2000 small cap index gained 3.2%. We note that the S&P 500 and the Dow have scored new records in recent days. The NASDAQ is trading less than 4% below its all-time high hit this past July. (The Russell is some 7.5% off its peak.)
Investor sentiment has strengthened, following the conclusion of the central bank’s Federal Open Market Committee (FOMC) meeting Wednesday. The Fed announced a fairly aggressive 50 basis-point reduction in short-term interest rates, bringing the federal funds rate to a range of 4.75%-5.0%. Chairman Powell implied that the FOMC could embark on a series of rate cuts, possibly lasting well into 2025, economic trends permitting. Each cut likely will be on the order of 25 basis points. Many on Wall Street are anticipating a total reduction of two percentage points, or more, by 2026, which would leave rates in the low-3% range.
Though the U.S. economy is still expanding and inflation has been relatively tame, the Fed is concerned about building softness in the jobs sector. Mr. Powell and other officials are keen to avoid a recession in the near term, as well as excessive unemployment. Chances look good that the central bank will achieve a soft landing for the economy. Key data will, of course, continue to be closely monitored.
Next week, the Fed will parse the latest inflation data, by way of the Personal Consumption Expenditures price index, for the month of August. Also noteworthy will be reports on personal income and personal spending for that month. Too, the Fed will get to weigh the potential implications of recent trends in the services and manufacturing sectors, the housing market, consumer confidence, durable goods orders, Gross Domestic Product, and initial jobless claims.
We would not be surprised to see the data streams be supportive of further rate cuts and incremental improvements to share prices through the end of 2024. That said, domestic political and geopolitical uncertainties, influential to the markets, persist. More specifically, the upcoming Presidential election in the U.S., a possible East Coast dock workers strike that would affect domestic goods deliveries, a seemingly expanding military conflict involving Israel in the Middle East, disruptions to the global supply chain caused by Houthi rebel activity in the Red Sea, the as-yet-unresolved fight between Russia and Ukraine, and tensions heightened by China’s military stance toward its regional neighbors.
In the meantime, portfolio diversification is paying off for individual investors. We reiterate maintaining a heavy weighting of top-quality, large cap issues, supplemented by holdings in mid- and small-cap equities. Over the past few weeks, a good deal of interest has been paid to the real estate, consumer staples, and utility sectors. At the same time, a fair number of investors have moved to lock in long-term rates on cash instruments, given the probable monetary moves coming from the Federal Reserve. – 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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