​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.