Guidance Wealth will be closed Monday, May 27th in Observance of Memorial Day.
The Markets Reading the economic tea leaves. Tasseography practitioners read tea leaves to forecast the future. Some economic data serve a similar purpose. Policymakers, central bankers, economists, and investors look at leading economic indicators to forecast where the economy may be headed. Classic leading indicators include: Consumer confidence. Consumer spending is the largest contributor to economic growth in the United States. When consumers feel confident about their finances, the economy may continue to grow, and vice versa. The slope of the yield curve. When yields for short-term U.S. Treasuries are higher than yields for long-term U.S. Treasuries, then a recession may be ahead. “Yield curve inversions have preceded each of the last eight recessions,” reported the Federal Reserve Bank of Cleveland. Stock market performance. Since investors make decisions based on how they believe the earnings of companies and the value of companies’ stocks will change over time, a rising or falling stock market is considered to offer insight to where the economy may be headed. “The leading indicators for the U.S. economy fell in April for the second month in a row…The leading index declined mainly because of weaker business orders, fewer permits to build new homes and a decline in stock prices last month. Stocks have since rebounded, however, to fresh record highs,” reported Jeffry Bartash of MarketWatch. “The economy slowed in the first quarter after heady growth in the second half of 2023. It’s unlikely to speed up much until inflation tapers off and the Federal Reserve cuts interest rates.” Some analysts believe rate cuts are still on the table for 2024, reported Sam Meredith of CNBC. Last week, the Consumer Price Index showed headline inflation (which measures price changes for a fixed basket of goods) and core inflation (which removes food and energy from the basket) both moved lower from March to April. Investors found a lot to like in the inflation data. U.S. stocks finished the week higher with the Dow Jones Industrial Average closing above 40,000. Yields on most maturities of U.S. Treasuries moved lower over the week, lifting bond prices. The Markets
Higher rates are doing what they’re supposed to do. Last week, Federal Reserve officials spoke about keeping the federal funds rate higher until it becomes clear that inflation will reach the Fed’s two percent target rate. While people typically don’t mind earning more interest on their saving and investment accounts, higher rates are painful for consumers. That pain is why higher rates help lower inflation. They discourage borrowing and cause people to buy fewer goods. Lower demand for goods and services should lead to lower inflation, reported Trina Paul of CNBC. So far, the biggest fly in the inflation-reduction ointment is housing. Diccon Hyatt of Investopedia explained: “In the first two decades of the 21st century, the U.S. built 5.5 million fewer homes than were needed, the National Association of Realtors estimated in a 2021 report…The effects of that housing shortage are rippling through the economy, most obviously in the form of soaring home prices…official inflation rates, which are designed to measure the cost of living, are highly sensitive to any changes in housing costs. Housing costs make up 45% of the Consumer Price Index (CPI), the most widely watched measure of inflation.” May data show consumers are feeling discouraged. The University of Michigan’s Index of Consumer Sentiment dropped 13 percent from April to May. “[The] decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups…They expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead,” stated Surveys of Consumers Director Joanne Hsu. While consumer sentiment dragged on markets, first quarter corporate earnings reports were stronger than expected, which lifted U.S. stocks. “With well over 80% of the S&P 500 having reported results, companies are on track to have increased earnings by 7.8%, well ahead of the April expectation of 5.1% growth,” reported a source cited by Lewis Krauskopf of Reuters. Declining sentiment caused U.S. stocks to stumble on Friday; however, major indices finished the week higher. Yields on many maturities of U.S. Treasuries moved higher over the week. The Markets
What will the Federal Reserve do? Uncertainty about the direction and timing of Fed rate cuts is causing stock markets in the United States to charge and retreat. U.S. stocks rallied for five consecutive months (anticipating rate cuts early in 2024) before retreating in April after higher-than-anticipated inflation suggested the Fed might delay any rate reductions. Markets retreated early last week on concerns the Fed might take a more hawkish tone following the Federal Open Market Committee (FOMC) meeting – but it did not. Following the meeting, the FOMC release stated: “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective…The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” While the Fed left its rate policy unchanged, it eased a bit using a different policy lever. “…[FOMC] policymakers gave a green light to slowing the pace at which the Fed is shrinking its Treasury holdings, which may modestly work against the rise in market interest rates,” reported Jed Graham of Investor’s Business Daily. Markets found the Fed’s moderate tone encouraging, and optimism expanded after the U.S. employment report suggested the labor market might be cooling off. “The indexes bounced back from early-week lows after the employment report revealed that the U.S. added fewer jobs than expected in April—but enough to indicate a still-growing economy. For now, that could help keep a lid on inflation, prevent the Federal Reserve from needing to raise rates again, and maybe even allow it to cut them,” reported Jacob Sonenshine of Barron’s. Major U.S. stock indices finished the week higher, according to Barron’s. The U.S. Treasury market rallied, too. Yields on longer maturities of U.S. Treasuries moved lower over the week. |
Archives
October 2024
|
Account Access
Fidelity Investments |
|