Stocks were under pressure last week, as the S&P 500 fell by 3.10 percent to 2,932.05. That still left the benchmark index up 16.96 percent 2019-to-date, and only 3.10 percent below the all-time closing high hit just one week earlier. As for performance during the month of July, the S&P 500 gained 1.31 percent, the 6th increase in the past 7 months. A big factor behind this year’s strong market performance has been the perceived dovish shift going on at the Federal Reserve, and policymakers last Wednesday indeed provided investors with the first interest rate cut in over a decade. Specifically, the Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate by 25 basis points to 2.00-2.25 percent, in what was a widely anticipated but arguably unneeded policy move. Moreover, recent economic data have been encouraging, especially when focusing on the U.S. consumer, and growth in household debt this cycle has occurred predominately in fixed-rate categories, i.e. student and automobile loans.
Altogether this means that not only may a rate cut be unnecessary currently but also that it may not provide as large a boost to household finances as we saw in prior cycles. This is in part why policymakers instead cited concerns about potential spillovers from much weaker economic conditions overseas and the escalating trade war as justifications for preemptive easing. The strong domestic backdrop is also why Fed chair Jerome Powell in his post-statement press conference tried to, somewhat unsuccessfully, dampen expectations for additional rate cuts anytime soon. The knee jerk reaction in the market immediately following last week’s FOMC announcement was to sell off sharply, but this has been the case for almost every other recent policy decision from the Fed and still equities eventually went on to hit new record highs. Further, during the past few decades when rates have been cut alongside elevated stock prices, forward returns in the S&P 500 have been overwhelmingly positive. However, there are still many unknowns (risks) for the markets to overcome in the near-term, and August and September have historically been the worst performing months of the year, so it would not be too surprising if volatility continues to pick up. Any regular investors unsure how to navigate this environment should consider consulting with a professional financial advisor and as always, we are here to help with any questions you may have.
To recap a few of the things we learned about the economy last week, the positives included that the nation’s trade gap narrowed, housing affordability improved, pending home sales jumped, household inflation pressures remained muted, wage growth firmed, Americans’ personal saving rate ticked higher, consumer confidence strengthened, small business hiring rebounded, corporate layoff announcements decreased, underemployment fell to a cycle low, and stronger productivity growth helped contain employment costs. As for the negatives, mortgage applications slid, construction spending declined, initial jobless claims ticked higher, and gauges of national and regional manufacturing activity continued to send mixed signals. This week the pace of economic data slows down considerably but there are still a few important reports on consumers, inflation, employment, and the U.S. service sector scheduled to be released.
What To Watch:
- MBA Mortgage Applications 7:00 AM ET
- Charles Evans Speaks 9:30 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- 10-Yr Note Auction 1:00 PM ET
- Consumer Credit 3:00 PM ET
- Jobless Claims 8:30 AM ET
- Wholesale Trade 10:00 AM ET
- EIA Natural Gas Report 10:30 AM ET
- 30-Yr Bond Auction 1:00 PM ET
Sources: Econoday, FRBG, WF, Twitter, FRBSL
Post author: Charles Couch