The Markets
 
After gyrating wildly throughout the month, major U.S. stock indexes finished August higher.
 
Despite a lot of uncertainty and some dramatic ups and downs, the Standard & Poor’s (S&P) 500 Index rose 2.3 percent in August, while the Dow Jones Industrial Average gained 1.8 percent to close at a record high. It was the fourth consecutive month of gains for both indexes, reported Connor Smith of Barron’s.
 
The month’s most remarkable comeback belonged to the Nasdaq Composite Index which eked out a 0.6 percent gain for the month. “That's a shocking turnaround, given the Nasdaq entered correction territory early in the month…,” reported Smith. (A correction is a decline of at least 10 percent.)
 
As sentiment calmed, the CBOE Volatility Index (VIX), which gauges how volatile investors expect the market to be over the next 30 days, moved lower. “Wall Street’s ‘fear gauge’—the VIX—dropped to 15. That’s after an unprecedented spike that took the index above 65 during the Aug. 5 market selloff,” reported Rita Nazareth of Bloomberg.
 
Why did investors seem to regain their confidence?
 
There was some good economic news last week that proved to be just what markets were hoping to see. The data were strong enough to allay fears the economy might weaken too fast, but not so strong they might cause the U.S. Federal Reserve (Fed) to change its mind about lowering the federal funds rate in September. Here’s what happened:
 

• The economy remains steady. Investors have been worried U.S. economic growth might be slowing more quickly than previously thought. Those concerns were soothed when the Bureau of Economic Analysis revised its estimate for gross domestic product (GDP)—which is the value of all goods and services produced in the U.S. —from April through June. “The U.S. economy grew faster than initially thought in the second quarter amid strong consumer spending, while corporate profits rebounded, which should help to sustain the expansion,” reported Lucia Mutikani of Reuters.

 

• Inflation continues to soften. On Friday, one of the Fed’s favored inflation gauges—the personal consumption expenditures (PCE) price index—showed headline inflation was 2.5 percent year over year. Core inflation, which excludes volatile food and energy prices, was up 2.6 percent year over year. “The soft price growth continues a recent stretch of cooler inflation readings and falls in line with what Fed officials were hoping to see before easing their restrictive monetary-policy stance,” reported Megan Leonhardt of Barron’s.

 
Last week, major U.S. stock indices moved higher. Yields for U.S Treasuries with shorter maturities moved lower over the week, while yields for longer maturities moved higher. 

​The Markets
 
The near future is more predictable than the distant future.
 
Last year, the St. Louis Federal Reserve explored the accuracy of recession forecasts. They found that short-term predictions about whether there would be a recession in the subsequent quarter were fairly accurate. However, projections for economic growth a year ahead were far less accurate. The researchers concluded, “Even though forecasts can help, we must live with significant uncertainty about future economic conditions.”
 
Investors experienced some of that uncertainty last week as economic data created confusion about the state of the economy. The Department of Labor released its preliminary revision of the employment report, which showed the number of jobs created from March 2023 to March 2024 was significantly lower than previously thought.
 
“The new estimates suggest monthly job growth of about 174,000, instead of the roughly 240,000 previously understood…At the end of the day, the revisions imply that the total number of jobs in the U.S. is just 0.5 [percent] smaller than previously thought,” reported Natalie Sherman of BBC News. She cautioned that the preliminary revision will be adjusted again and that, “Over the last four years, the final estimates of job growth have ended up higher than indicated in August.”
 
Other figures released last week weren’t particularly helpful. In August, manufacturing data was softer than expected. However, sales of existing homes rose in July as supply increased and interest rates fell, reported Seana Smith and Madison Mills of Yahoo! Finance.
 
The Economist also weighed in on the state of the U.S. economy last week. It asked whether America was already in a recession as some rules of thumb have suggested. It concluded:
 
“Recession rules are based on the premise that once news gets bad enough, it will worsen further. Historically, that has been a decent bet: unemployment shoots up quickly and then falls slowly; central banks tend to raise interest rates until something breaks. Yet today the Federal Reserve has room to ease and, given the unusual labor-market recovery, some bumpiness does not spell disaster. Although America’s gangbusters expansion is calming, a gradual slowdown is not a crash—no matter what the rules say.”
 
On Friday, investors were reassured by Federal Reserve Chair Jerome Powell who indicated he is confident “inflation is on a sustainable path back to 2 percent,” and “the time has come for policy to adjust.” Many market watchers interpreted that to mean a rate cut is ahead in September. Major U.S. stock indices finished the week higher, and yields on most maturities of U.S. Treasuries moved lower.

​The Markets
 
The best week of the year?
 
After two weeks of slow and jolting market performance, a bounty of positive news calmed investors and lifted stock markets higher last week.
 
“Investors seem to have come to the realization that while the economy may be in fact slowing, the Federal Reserve is going to take action to address that by cutting interest rates on Sept. 18…with a September rate cut a near certainty, the mood in the market has turned on a dime,” reported Paul R. La Monica of Barron’s.
 
Here’s what happened:
 
Inflation continued to move lower. In July, prices rose 2.9 percent year to year, according to the latest Consumer Price Index report. That was an improvement on June’s 3.0 percent increase. The price of gasoline, new and used vehicles, and medical care moved lower, while the cost of shelter, motor vehicle insurance and recreation moved higher.
 
“It was the first time that the annual pace of inflation was below 3 [percent] since spring of 2021. Even though June’s inflation reading was slightly better, the pricing data from last month will likely help convince Fed officials to cut interest rates by at least a quarter of a percentage point at their next policy meeting in September,” reported Megan Leonhardt of Barron’s.
 
Consumer spending remained strong. Consumer spending is the engine that drives the American economy. After slowing (down 0.2 percent) in June, retail sales accelerated (up 1.0 percent) in July, according to the U.S. Commerce Department’s Advance Monthly Sales for Retail and Food Services.
 
“The retail sales numbers were a blowout versus consensus [expectations], but more importantly it should lay to rest (at least for the moment) all of the ‘doom and gloom’ that was expressed at the beginning of this month,” said a source cited by Rita Nazareth of Bloomberg.
 
Consumer sentiment brightened. In August, for the first time in five months, consumer sentiment improved, according to the University of Michigan’s Consumer Sentiment Survey. Joanne Hsu, the Survey of Consumers Director, wrote:
 
“Overall, expectations strengthened for both personal finances and the five-year economic outlook, which reached its highest reading in four months, consistent with the fact that election developments can influence future expectations but are unlikely to alter current assessments. Survey responses generally incorporate who, at the moment, consumers expect the next president will be. Some consumers note that if their election expectations do not come to pass, their expected trajectory of the economy would be entirely different. Hence, consumer expectations are subject to change as the presidential campaign comes into greater focus, even as consumers expect that inflation—still their top concern—will continue stabilizing.”
 
 
Major U.S. stock indices finished the week higher. The yield on longer-maturities of U.S. Treasuries moved higher over the week.

​The Markets
 
Markets were gripped by August jitters.
 
Last week, financial markets were volatile. The CBOE Volatility Index (VIX), which is known as Wall Street’s fear gauge, rose to the highest level in four years before cooling down. “While spikes in the VIX often coincide with deep market sell-offs, they can also be short-lived and precede a rebound for stocks,” reported Jesse Pound of CNBC.
 
Investor uncertainty contributed to market fluctuations last week. There were many reasons for the uncertainty. For example, some investors:
 
Were unsettled by economic data. Markets stuttered after a weaker-than-expected jobs report. Some investors panicked, believing the United States might be headed for a recession rather than a soft landing.
 
“A slowing economy could create challenges for equities to achieve the kind of earnings growth that analysts were penciling in for the quarters ahead,” noted a source cited by Connor Smith of Barron’s.
 
On Thursday, investors regained some confidence after data showed the number of people filing for unemployment claims was lower than expected. The information suggested the labor market remained solid. The subsequent rally was unexpected because jobless claims don’t normally move the market, reported Barron’s.
 
Concerned about geopolitical risks. Recently, the United States, the United Kingdom, Australia, France, Canada, South Korea, Saudi Arabia, Japan, Turkey and Jordan all warned their citizens to leave Lebanon as quickly as possible on fears that hostilities in the Middle East may escalate, reported Tom Bennett and Hugo Bachega of the BBC.
 
“Iran, Israel and Hezbollah all have the capabilities to continue to attack each other without triggering physical supply cuts in energy or blocking global shipping. Those are the kinds of effects that would trigger a major market reaction. Though a persistent danger is that, in the fog of war, one party or other goes too far or misreads its adversaries’ intent. Events can quickly spiral out of control,” reported Matt Peterson in Barron’s.
 
May have been less experienced. It’s summertime and people—including money managers and traders—are vacationing. The Economist explained,
 
“Spare a thought, then, for the 20-somethings left to run the northern hemisphere’s trading desks over the next few weeks, while their bosses doze on a beach. Possibly for this reason, markets are often more jittery than usual during the summer months. Last year, for example, it was in August that American share prices began their final protracted fall before a storming bull run that took them to new all-time highs. That may be down to liquidity, which…tends to be slightly thinner during the holiday season than in the rest of the year. It may also be that the lack of veterans on banks’ trading floors allows panic to set in more easily. Prices can swing a lot further before someone musters the courage to push back.”
 
Despite sharp swings higher and lower, major U.S. stock indices finished the week close to where they started it. The yield on the benchmark 10-year U.S. Treasury finished the week higher.

The Markets
 
Stock markets swelled and dropped like waves at the Olympic surfing competition in Tahiti.  
 
It is often said that markets hate uncertainty. There was a lot of uncertainty last week, and it showed. “The technology-heavy Nasdaq 100 Index soared 3 [percent] on Wednesday and then retreated almost that much on Thursday, before paring the decline at the close, for its biggest up-to-down rotation since May 2022. The S&P 500 Index sank 1.4 [percent], just one day after rallying 1.6 [percent],” reported Alexandra Semenova, Esha Dey, Carmen Reinicke, and Natalia Kniazhevich of Bloomberg. 
 
High levels of market volatility reflect high levels of uncertainty. Here are three issues that have been top-of-mind for investors:
 
1.  Will the United States experience a soft landing or dip into a recession? Last week, investors became concerned that the U.S. economy may be slowing faster than anticipated. First, a key gauge showed that U.S. manufacturing activity slowed in July, reported Lucia Mutikani of Reuters. Then, on Friday, the U.S. unemployment rate rose to 4.3 percent as employers added fewer new jobs than economists had anticipated.
 
Investors were in a tizzy after seeing weaker-than-expected data. Expectations about the magnitude of a possible Federal Reserve rate cut in September changed—and then changed again. On Friday, the CME FedWatch Tool registered a 74 percent probability of a half-percentage-point rate cut at the Fed’s September meeting, suggesting that the market thought the Fed was likely to begin easing rates too late and would have to lower aggressively. Markets took some calming breaths and, on Saturday, expectations had reversed. There was a 22 percent probability of a half-point cut in September and a 78 percent chance of a quarter-point drop.
 
2.  Will geopolitical issues escalate? There is a lot happening around the world that could affect financial markets. One concern is ongoing tensions in relations between the United States and China. In addition to tariffs and trade issues, there are allegations that China is providing support for Russian war efforts in Ukraine, and concerns about a possible conflict over Taiwan. Energy security also is a risk as wars in Ukraine and the Middle East have disrupted energy supplies in some regions of the world, according to to S&P Global and David McHugh and Matthew Daly of AP News.
 
3.  Who will win the United States election?There has been—and will continue to be—a lot of speculation about the outcome of the U.S. election and its potential effect on the economy and markets. The emotion that accompanies elections can make it difficult to remember that financial markets are generally efficient and adjust to changing risks. While election sentiment may sway stock markets over the shorter term, other factors—valuations, earnings, and the business cycle—also are important,” reported Karishma Vanjani of Barron’s.
​ 
Last week, major U.S. stock indices moved lower with the Nasdaq Composite Index dropping into correction territory as it fell by about 10 percent. The U.S. Treasury market rallied as the yield on the benchmark 10-year Treasury fell to its lowest level since last December, reported Pia Singh and Hakyung Kim of CNBC.

​The Markets
 
Americans may be witnessing something remarkable.
 
Earlier this year, we had the relatively rare opportunity to view a total solar eclipse – when the moon passes between the sun and the Earth, blocking the sun completely – as it crossed numerous states. Now, we may see the United States’ economy experience a soft landing – when the Federal Reserve raises rates to fight inflation and does not cause a recession.
 
“According to the conventional wisdom, the Federal Reserve has managed to achieve only one soft landing in the past 60 years—in 1994–1995,” wrote economist Alan Blinder in an abstract for the Journal of Economic Perspectives.
 
Blinder’s research suggests that soft landings are more common than conventional wisdom suggests – but not easy to achieve. From 1965 to 2022, the Federal Reserve tightened monetary policy to fight inflation eleven times. In five cases, the Fed achieved a soft or softish landing. It appears that the Fed may be about to add another soft landing to the list.
 
The U.S. economy grew 2.8 percent in the second quarter of 2024 (after inflation), which is faster than economists expected. The economy grew as businesses continued to invest and consumers continued to spend on goods and services, according to figures released last week by the U.S. Department of Commerce.
 
“A robust economy is a good sign for the average consumer, and because it came in tandem with positive data on prices, it is in line with the soft landing of a healthy economy and cooling inflation that Federal Reserve officials are looking to achieve. Economists consider real GDP growth rates of between 2% and 3% to be healthy in developed economies…The personal consumption expenditures price index increased 2.6% during the second quarter—the slowest pace since the first quarter of 2021. That is a marked slowdown from the 3.4% pace recorded in the first three months of the year,” reported Megan Leonhardt of Barron’s.
 
Markets moved lower early in the week and then regained some lost ground after economic growth and inflation figures were released, reported Connor Smith of Barron’s. By the end of the week, the Dow Jones Industrial Average was up, while the Standard & Poor’s 500 Index and Nasdaq Composites indexes finished the week lower. Yields on most maturities of U.S. Treasuries moved lower over the week.

​The Markets
 
The rate cut stars are aligning.
 
For the last year, borrowing costs in the United States have remained relatively high as the U.S. Federal Reserve (Fed) waited for economic data to show that inflation was on track to reach the Fed’s two percent target. Now, we may finally be on the cusp of lower rates.
 
“The Fed’s preferred inflation gauge has eased to 2.6 [percent], not far off its 2 [percent] target, and the once overheated labor market has cooled to pre-pandemic levels. The rebalancing has been accompanied by moderation in consumer spending, as high prices and borrowing costs tamp demand and thus price pressures,” reported Victoria Cavaliere of Bloomberg.
 
Last week, Fed Chair Jerome Powell told the Economic Club of Washington D.C., “…if you wait until inflation gets all the way down to 2 [percent], you probably waited too long…Our test has been that we wanted to have greater confidence that inflation was moving sustainably down toward our 2 percent target. What increases that confidence is more good inflation data and, lately here, we have been getting some of that.”
 
Few anticipate the Fed will lower the federal funds rate at its July meeting, but the outlook for September is good. The probability of a September rate cut was above 90 percent last week, according to the CME FedWatch.
 
Changing rate expectations disrupted stock markets, last week. Investors moved from big technology firms into smaller companies that tend to perform better when rates are lower. Rita Nazareth of Bloomberg explained that the market experienced, “a ‘rotation’ that saw investors trimming positions on this year’s winners in favor of laggards. Underpinning that trade were bets the 2024 rally would broaden out of megacaps as the Federal Reserve cuts rates.”
 
By the end of the week, the Standard & Poor’s 500 Index was down about 2.0 percent and the Nasdaq Composite had fallen about 3.7 percent. The Dow Jones Industrial Average fared better, finishing the week in positive territory, reported Alex Harring and Jesse Pound of CNBC. Yields on U.S. Treasuries were mixed over the week.

​The Markets
 
Will deflation continue?
 
In May, Pew Research asked Americans about the biggest problems facing our nation. The top three answers were:
 

1. Inflation;
2. The ability of Democrats and Republicans to work together; and
3. The affordability of health care.

 
Last week, there was some good news about the first issue. Inflation became deflation as the Consumer Price Index (CPI) fell in June after remaining unchanged in May. Headline inflation was ‑0.1 percent month over month.
 
Megan Leonhardt of Barron’s reported on the CPI’s findings: “The details under the hood, so to speak, also largely provided good news for consumers and Fed officials. Goods deflation continued — driven by falling new and used vehicle prices—while services costs also trended down. And housing costs, a persistently stubborn sector when it comes to progress in taming inflation, increased just 0.2% on the month — a slowdown from the consistent monthly readings of 0.4%.”
 
Cooling inflation may lead the Federal Reserve (Fed) to begin lowering the federal funds rate – and that would make borrowing less expensive. Optimism about lower rates led to a bond market rally, and a realignment in the stock market. Rita Nazareth of Bloomberg explained:
 
“Wall Street traders betting the Federal Reserve will be able to cut rates soon sent bond yields tumbling — while driving a big rotation out of the tech megacaps that have powered the bull market in stocks. Further signs that inflation is slowing down fueled speculation the Fed will be able to move as early as September. Optimism over lower rates sparked a shift into riskier corners of the market — as money exited the long-favored safety trade of big tech.”
 
Last week, major U.S. stock market indices moved higher with the Dow Jones Industrial Average hitting its first record high for 2024, reported Jacob Sonenshine. The yield on the benchmark 10-year U.S. Treasury note moved lower last week.
 
Over the weekend, after this commentary was written, there was an attempt to assassinate former President Donald Trump. We condemn this senseless act. We will stay alert to how this affects financial markets.

 
The Markets
 
Despite some volatility, stock markets have been buoyant in 2024.
 
Enthusiasm for artificial intelligence (AI), optimism about inflation, and expectations that the United States Federal Reserve (Fed) will begin to lower rates this year have helped global and U.S. stock markets, overall, push higher in 2024. Share prices increased more slowly in the second quarter, though. Here’s what happened:
 

• Off to a rocky start. Overall, stocks declined in April after inflation numbers came in higher than economists had expected. That sparked concern the Fed might leave rates higher for longer than many investors hoped.  “Markets had expected the Fed to start cutting interest rates in June with three reductions in total expected this year, but that shifted dramatically following the release [of the Consumer Price Index],” reported Jeff Cox of CNBC. Markets now expect the first rate cut in September.

 

• Bounding ahead. U.S. stocks rallied in May and June as companies in the Standard & Poor’s (S&P) 500 Index reported strong earnings growth for the first quarter of 2024. Overall, earnings, which represent companies’ net profits, grew 6 percent, and 78 percent of S&P 500 companies were more profitable than analysts had expected, according to John Butters of FactSet.  Investor optimism also was bolstered by May inflation data that showed inflation was headed in the right direction – lower. Sarah Hansen of Morningstar reported, “Bond markets recovered in the second quarter, boosted by improving inflation and a firmer, more confident outlook for rate cuts.”

 

• Inspired by AI. Most of the top performing stocks in the S&P 500, to-date, have been technology companies, which are reaping the benefits of strong corporate spending on AI, reported Iuri Struta of S&P Global Market Intelligence in late June. However, technology companies may not deliver the results share price valuations suggest investors expect anytime soon. The Economist explained:     “…for AI to fulfill its potential, firms everywhere need to buy the technology, shape it to their needs and become more productive as a result. Investors have added more than $2trn to the market value of the five big tech firms in the past year—in effect projecting an extra $300bn-400bn in annual revenues according to our rough estimates…For now, though, the tech titans are miles from such results.”

 

• Looking for the way down. The Fed anticipates zero to two rate cuts this year. While many central banks around the world already have begun lowering rates, the Fed has yet to act. Last week’s employment report suggested the economy might be losing steam, and that could lead to the first Fed rate cut. The report indicated employers added more jobs than expected, but fewer than were added in the previous month.  “The path toward a rate cut in September is far from certain, but Friday’s data provide more evidence that the U.S. labor market is losing steam…It’s worth remembering that the other half of the Fed’s dual mandate is maximum employment, and weakening labor conditions have certainly prompted central banks to cut rates in the past,” reported Megan Leonhardt of Barron’s.

 

• It’s not what you think! In May, a Harris poll for The Guardian found that a lot of Americans share some incorrect beliefs about stock markets and the economy. Poll participants said: (1) the S&P 500 Index was down for the year (49 percent); (2) the United States is in a recession (55 percent); and (3) unemployment is at a 50-year high (49 percent). All of these statements are incorrect.
  
  • The S&P 500 is up more than 16 percent year to date and has chalked up 34 record-high closes so far this year.  
  • The U.S. economy is growing. The last U.S. recession was in 2020, during the pandemic.
  • Unemployment is low – near a 50-year low for much of 2024 to date.

 
While inflation has fallen sharply, it affects economic well-being and opinions about the state of the economy. “[A majority of] respondents agreed ‘it’s difficult to be happy about positive economic news when I feel financially squeezed each month,’” reported Lauren Aratani of The Guardian.
 
Last week, major U.S. stock market indices moved higher. Yields on intermediate and longer maturities of U.S. Treasury bonds moved lower over the week. 

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The Markets
 
Some good news and some volatility.
 
Last week was a mixed bag as investors weighed positive economic news against concerns that stock prices for some chipmakers may not be sustainable. Here are the highlights:
 

• Inflation slowed to zero.

 
On Friday, one of the Fed’s favored measures of inflation – the Personal Consumption Expenditures (PCE) Index – showed that headline inflation was flat in May. Both headline inflation and core inflation, which excludes volatile food and energy prices, were up 2.6 percent year over year. That’s a significant improvement from May 2023 when headline inflation was 3.8 percent year over year, and core inflation was 4.6 percent. The Fed’s target is 2.0 percent.
 
Falling inflation bolsters “the case for lower interest rates later this year. At the same time, household spending rebounded after a pullback in April, and incomes showed solid growth, offering some hope that price pressures can be tamed without lasting damage to consumers,” reported Augusta Saraiva of Bloomberg.
 

• The banks are alright.

 
Every year, the Federal Reserve (Fed) conducts a stress test to see whether “large banks* are sufficiently capitalized and able to lend to households and businesses even in a severe recession. They evaluate the financial resilience of banks by estimating losses, revenues, expenses, and resulting capital levels under hypothetical economic conditions.”
 
Last week, the Fed released its report, and all the banks tested – 31 of them – passed. Each bank was able to absorb losses in highly stressful hypothetical scenarios while maintaining its minimum capital requirements.
 

• AI stocks were up and down.

 
Investors have high expectations for artificial intelligence (AI) chipmakers. As a result, share prices for many chip companies have dramatically increased in value over the past year. Last week, we saw some volatility. A leader in the category experienced a correction, which is a decline of at least 10 percent, before rebounding, reported Charlotte Yang and Yoolim Lee of Bloomberg.
 
In addition, we saw the stock price of a company that makes computer memory chips drop after it reported earnings last week. The company’s “shares had more than doubled in the year prior to its Wednesday report, but — even with an outlook roughly in line with the average of analyst estimates — the company was punished for not outperforming elevated expectations.”
 
Last week, major stock market indices delivered a mixed performance. Connor Smith of Barron’s reported, “The Dow rose 3.8% in the first half of the year. The S&P 500 rose 14.5%. The Nasdaq Composite rose 18%.” Yields on longer maturities of U.S. Treasury bonds moved higher over the week.
 
*This category includes organizations – U.S. bank holding companies, covered savings and loan holding companies, and intermediate holding companies of foreign banking organizations – with $100 billion or more in assets.