WEEKLY MARKET UPDATE

The Fed hiked short-term interest rates again on Wednesday, but stocks finished higher on the week as earnings have come in better than expected, economic data mostly surprised to the upside, and inflation gauges continued to decelerate. As a result, economists are beginning to talk about “immaculate disinflation” as aggressive monetary policy from the Fed appears to have slowed inflation without destroying economic growth, an outcome most had anticipated entering the year. 

For example, this week’s second quarter (Q2) GDP came in at an annualized rate of 2.4%, easily topping 2% estimates while Thursday’s jobless claims came in at their lowest levels since February and consumer confidence jumped to two-year highs.  This coincided with the lowest inflation readings from the core PCE (personal consumption expenditures) and the employment cost index since 2021. Adding more fuel to the stock market rally has been the Q2 earnings season that while on pace for a third consecutive quarter of negative profit growth, has seen results beat expectations at materially higher rates than the five-year average while guidance from management has grown increasingly optimistic. As a result, the S&P 500 is up about 20% on the year and the Dow Jones Industrial Average was able to string together a 13-day rally, a streak that last occurred in 1987.

The Federal Reserve does not meet again until September 19th, so earnings and inflation data will be particularly important in the meantime. Next week, over 160 companies in the S&P 500 report earnings, headlined by Apple and Amazon. To be clear, the trend is firmly lower as the CPI has declined twelve straight months, but recently we have observed some signs of renewed inflationary pressures that need to be monitored. For example, with US gas prices recently hitting 8-month highs coupled with Russia’s withdrawal from the Black Sea Grain Initiative, the Bloomberg commodity index is up 7% so far in July.  Therefore, while we believe the long-term trajectory of inflation is lower, we would not be shocked if we eventually see a hot inflation print. The CPI reports on August 10th and September 13th will be crucial as expectations of another rate hike from the Fed will rely heavily on these releases.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder

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