09/30/2024 Market Strategy
Another Month Another Dollar
The S&P 500 Reached a New Record High Last Week as the Market Anticipates Further Rate Cuts
Key Takeaways
- Thursday’s record high for the S&P 500 took the market 20.3% above its level at the end of last year and less than 3% from our target of 5,900 for the index for the end of 2024.
- Last week’s two major consumer surveys showed conflicting views on sentiment in August. The surveys also showed divergence on consumers’ inflation outlooks, which remain a key driver of consumer confidence.
- Data on the deflator for personal consumption expenditures, the Fed’s preferred gauge of inflation, showed benign price pressures in August, with both the headline and core indexes rising just a tenth from July.
- This week’s data on manufacturing, services, and jobs will provide near term opportunity for market participants to ponder where the markets go from here.
Last week saw the US equity market lag both developed international and emerging market stocks as US major equity benchmarks reflected a further weakening of the dollar on back of the aforementioned rate cut expectations stateside and China officials’ announcement last week of changes in policy to stimulate its troubled economy.
This week brings a hefty calendar of US economic data for investors to ponder ranging from manufacturing and construction data to services activity ending with jobs, unemployment, and wage growth on Friday.
In the week just ended a trough of data showed progress in gauges of inflation even as the Fed’s inflation target of 2% remained elusive. Two widely followed gauges of consumer sentiment offered contrasting views on how the consumer felt in data released last week.
A modest wobble last week on the day of the Fed’s announcement (Wednesday) occurred as market participants pondered what the first cut might mean for the economy and what it might portend for stock prices. Thursday followed with what seemed like a broad-based celebration that drove the S&P 500 to its latest record high. Then on Friday the Dow Jones Industrial Average hit a new high.
From our perch on the market radar screen, market reaction to the Fed’s move last week appeared quite normal with varied sentiments and opinions testing the decision in the days immediately following the announcement.
A busy calendar of economic data this week along with results of seven companies reporting this week (ahead of when Q3 earnings season gets under way when the big banks begin reporting on October 11) should add to the market color in the day to day as market participants ponder and plot what comes next.
While we had expected the Fed to cut just 0.25% last Wednesday we surmise that the elements of economic weakness the latest Fed Beige Book had shown among the central bank’s 12 regions added to its commitment to the full employment part of its dual mandate in making its decision to cut 0.5%.
We continue to expect the Fed will cut rates further by another 25 bps in each of the November and December meetings if the incoming economic data warrant such moves.
We remain positive on equities and maintain our 5900 target price for the S&P 500 by year end.
Last week’s rate cuts could provide relief to the interest rate logjam that’s plagued the housing market as well as deliver some help to other areas in the economy that have been pressured by high rates such as commercial real estate, personal loans and small business activity.
In our view, small and mid-cap stocks, which have seen interim rallies since last year on expectations of the Fed cutting rates, could benefit from a lower interest rate regime now that the Fed has begun to cut rates.
We believe it’s important to keep expectations right sized in an environment of economic transition to a new normal in rates.
Notwithstanding election year nervousness on policies intimated by either Presidential candidate as well as increased geopolitical risk in the Middle East and Asia, the S&P 500’s closing price last Friday of 5713.64 suggests to us that the market, bolstered by economic resilience and a friendlier Fed, may want to move higher.
The Week Ahead
This week’s data on manufacturing, services, and jobs will provide near term opportunity for market participants to ponder where the markets go from here. October like September carries its own history of challenging bullish sentiment.
We remain positive on equities and maintain our 5900 target price for the S&P 500 by yearend.
The Fed’s recent rate cut and expectations for further cuts should provide some support for the bullish outlook to be nurtured. That said beyond this week’s brace of data points and the turn of the page in the calendar investors will be looking ahead to October 11 when the big US banks begin to report Q3 results for clues as to the direction the markets are likely to take headed into the election in November.
We believe it’s important for investors to keep expectations rightsized in an environment of economic transitioning, a normalization process for rates and a watershed-like period of innovation in the current economic cycle and the secular (longer term) period ahead.
Notwithstanding election year nervousness on policies intimated by either Presidential candidate as well as heightened geopolitical risk in the Middle East the S&P 500’s closing price last Friday of 5738.64 suggests to us a market bolstered by economic resilience and wanting to go higher
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