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Current Market Observations

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For the week of May 10th, the Dow Jones Industrial Average rose 2.2%, the S&P 500 Index rose 1.9%, and the NASDAQ rose 1.2%. Utilities were the best-performing sector for the week (+4.1%), while consumer discretionary was the worst-performing sector (+0.2%). The labor market experienced a minor setback last week, as weekly unemployment claims rose to 231,000 from 209,000 the prior week. This follows the unexpectedly weak non-farm payroll growth and unemployment rate reported for April. Readings like this will hopefully support the Federal Reserve in commencing interest rate cuts this summer. The 10-year U.S. Treasury closed the week at 4.50%, unchanged from the previous week.  

U.S. & Global Economy 

Last week was quiet on the U.S. economic data front. The most notable data points for the week were the weaker-than-anticipated jobless claims number reported on Thursday and Friday’s preliminary reading of consumer sentiment for May, which was weaker than expected. Later this week, all eyes will be on a fresh batch of inflation numbers scheduled to be reported. The Producer Price Index will be reported on Tuesday, with the Consumer Price Index set to be reported on Wednesday. We note below why the data will hang heavily on the Biden administration and their reelection hopes.  

 Policy and Politics 

We are encouraged to see Israel-Palestine ceasefire talks help remove risk premium in oil, with prices dropping below the $80 mark. However, there seems to be little real action in negotiations to end this regional conflict. This comes as the Russia-Ukraine war has seen an uptick in intensity by Russia as foreign aid to Ukraine has been slow to move.  

We have shown in the past that regardless of which party is in the White House, stock markets rally when the economy is growing and doing well. However, in elections, data matters, and the inflation problem continues in our economy, with the final path to 2% inflation continuing to be difficult to attain. See Chart 1 below from Dan Clifton at Strategas and the Wall Street Journal, showing the average annual CPI (Consumer Price Index) Inflation during the past eight Presidential first terms. Other President Carter had a higher reading. While it is fair to say the COVID-19 pandemic wreaked havoc on inflation, legislative and administration actions during President Biden’s first term pumped $7.2 trillion into the economy, eventually creating strong demand for goods and services. The inflation story will become more important as we move closer to November.  

Economic Numbers to Watch This Week 

  • U.S. Producer Price Index YoY (Year Over Year) for April 2024, prior 2.09% 
  • U.S. Core Producer Price Index YoY for April 2024, prior 2.37% 
  • U.S. Consumer Price Index YoY for April 2024, prior to 3.48% 
  • U.S. Core Consumer Price Index YoY for April 2024, prior to 3.80% 
  • U.S. Initial Claims for Unemployment Insurance for the week of May 11, 2024, prior 231,000 

Despite the potential for volatility in the coming months stemming from uncertainties around the Federal Reserve’s interest rate outlook and looming concerns over the U.S. presidential elections, market gains continue to be buoyed by the upward trend in corporate earnings. 90% of S&P 500 companies have reported first-quarter earnings, and the results have thus far exceeded analysts’ expectations by 8.5%. According to FactSet, the Wall Street analysts lifted their earnings-per-share estimates for second-quarter results by 0.7%. Remember, when companies make money, they make capital expenditures, pay dividends, buy back stock, and hire employees. Follow the data but proceed cautiously. Please contact your advisor at Valley National Financial Advisors with any questions.  

Current Market Observations

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For the week, the Dow Jones Industrial Average rose 1.1%, the S&P 500 Index rose 0.6%, and the NASDAQ rose 1.4%. Utilities were the best-performing sector for the week (+3.4%), while energy was the worst-performing sector (-3.3%). Following Wednesday’s FOMC decision to leave rates unchanged, markets felt relieved that the Fed indicated it is not currently considering raising rates. Chair Powell described the current monetary policy as appropriate for handling appropriate scenarios. Overall, it is reassuring to see companies delivering robust earnings, with an impressive 79% surpassing analysts’ projections, resulting in an average upside surprise of almost 9%. The 10-year U.S. Treasury closed the week at 4.50%, a stunning 17 basis points lower than the previous week, showing that traders are finally accepting the next move the Fed will be to lower rates. 

U.S. & Global Economy 

Certainly, all investors know we have a U.S. presidential election in November of this year. It is normal to have investor anxiety around events like this. Still, the markets are more efficient than investors, and the markets seem to understand that either outcome in November is a known commodity one way or another. Major elections and changes to interest rates can be two of the most unsettling things investors face. However, through presidents from both parties and countless interest-rate changes, the stock market has been resilient and has taken these changes in stride. See Chart 1 from Hartford, Morningstar, and the Federal Reserve Bank, which shows the growth in the S&P 500 and the Fed Funds Rate over the past 60+ years and multiple changes in administration showing the growth in the S&P 500 and the Fed Funds Rate over the past 60+ years and multiple changes in  administrations. 

Policy and Politics 

Last week, Israel stated their refusal to agree to Hamas’ demands for ending the conflict in Gaza, as both sides continue to exchange accusations amidst ongoing ceasefire negotiations, which have yet to show considerable progress. On Friday, the Russia-Ukraine conflict entered its 800th day, marking another significant milestone in the prolonged battle, which shows no immediate signs of ending. 

Economic Numbers to Watch This Week 

  • U.S. Consumer Credit for March 2024 prior $14.1 billion 
  • U.S. Wholesale inventories for March 2024 prior 0.5% 
  • U.S. Initial Claims for Unemployment Insurance for the Week of May 4th, 2024, prior 208,000 
  • U.S. Consumer sentiment (prelim) for May 2024, prior 77.2 
  • U.S. Monthly U.S. federal budget, April 2024 -$236 billion 

Markets do not move in a straight line. After five consecutive monthly gains, markets moved lower in April, with the S&P 500 down by 4.2%. Despite moderation in the first quarter of GDP (Gross Domestic Product) and a slight cooling in job growth for the month of April, we continue to see the U.S. economy on solid footing. It is promising to see earnings growth and performance leadership broadening beyond the popular mega-cap tech stocks. This builds a sturdy base for the market to continue to move higher. Please contact your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

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Markets were mixed on a holiday-shortened trading week, with the Dow Jones Industrial Average rising 0.8%, the S&P 500 Index increasing by 0.4%, and the NASDAQ falling -0.3%. Utilities were the best-performing sector for the week (+2.9%), while information technology was the worst-performing sector (-1.3%). Oil prices continued to move higher, finishing the week with a 3.2% gain. Friday saw the Fed’s preferred gauge for inflation, the Personal Consumption Expenditure Index, rise 0.3% (excluding food & energy), matching economists’ expectations. The 10-year Treasury saw continued buying last week, pushing yields down four bps for the week, finishing at 4.21%.

U.S. Economy 

Although last week was a quiet week for economic releases, on Friday, we saw the Federal Reserve’s preferred gauge of inflation, U.S. Core Monthly and Yearly PCE (Personal Consumption Expenditures) for February, and both measures were lower, signaling that inflation continues to fall, see Chart 1 below from Valley National Financial Advisors and Y Charts shows U.S. Core Monthly and Yearly PCE for five years. Federal Reserve Bank Chairman Jerome Powell has stated very clearly that they are watching the inflation data and will be data-dependent in terms of rate movements. The current Fed has been the most transparent we can remember regarding interest rate movements, which is why we do not expect any rate cuts until well into the second half of 2024, and even then, those movements in rates, if any, will be mild and data dependent.

This week, we will see numbers for new payrolls and unemployment insurance for March 2024, and companies will start to prepare for 1st Q EPS reports. Otherwise, we will have a quiet week regarding economic releases.  

Policy and Politics 

Last week saw a holiday-shortened week for Washington, with Good Friday on March 29th. Elevated geopolitical tensions persist amid the ongoing conflicts in the Middle East and the Russia-Ukraine war. U.S.-China trade tensions continue to be elevated with recent news of China’s oversupply of solar energy, electric vehicles, and lithium-ion batteries impacting U.S. producers. President Biden trails former President Trump by around two points in national polling and around three points in swing states. Prediction markets show roughly even odds of a Democratic or Republican win.

Economic Numbers to Watch This Week 

  • U.S. ISM manufacturing for March 2024, prior to 47.8 
  • U.S. Factory Orders for February 2024, prior –3.6% 
  • U.S. Job Openings for February 2024, prior to 8.9 million 
  • U.S. ADP Employment for March 2024, prior 140,000 
  • U.S. ISM Services for March 2024, prior 52.6 
  • U.S. Employment Report for March 2024 
    • Nonfarm payrolls, prior 275,000 
    • Unemployment rate prior 3.9% 

Updates from Federal Reserve Board Members continue highlighting lower inflation readings, improved outlook for GDP growth in coming quarters, and healthy job growth. Markets appear to be warming to the idea that stronger growth for longer is preferred over lower rates. We are encouraged by signs of housing supply improvement, which should help this year’s spring selling season. As earnings season kicks off in the coming weeks, we will be listening to any signs of economic softness communicated by corporate management teams. We continue to monitor geopolitical risks for signs of increased tension and spillover into new areas. Please reach out to your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

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Equity markets were down last week, with all three major indexes reporting negative results. The S&P 500 Index fell –0.26%, the NASDAQ -1.17%, and the Dow Jones Industrial Average –0.93%. Fixed income markets saw lower yields last week as Fed Chair Powell gave an indication that rate cuts are “not far” off. Also impacting rates was the February jobs number, which showed lower wage pressure and revisions lower than the hot January jobs numbers. A big test for bond markets will come later this week when the CPI (Consumer Price Index) and PPI (Producer Price Index) numbers are reported for January. The 10-year U.S. Treasury bond yield fell 9.4 basis points last week to close at 4.09%.

U.S. Economy 

The February jobs report from Friday indicates job growth remains healthy, with nonfarm payrolls increasing 275,000 jobs, above consensus expectations for a rise of 198,000. This follows a downwardly revised 229,000 increase in January. Despite encouraging headline figures, prior estimates of job expansion in December and January were revised down to 167,000 jobs. The unemployment rate rose to a two-year high of 3.9%, and wage momentum cooled, indicating less inflationary pressure.

Policy and Politics 

During testimony last week, Fed Chair Powell indicated a softening of banking rules, specifically stating that proposed new rules to force lenders to strengthen their balance sheets (Basel III) would be scaled back or reworked. This comes in response to complaints from industry leaders about the overall cost and economic impact of enacting the original proposed changes. 

What to Watch This Week 

  • U.S. Consumer Price Index released 3/12/24, prior +0.3% 
  • U.S. Retail Sales released 3/14/24, prior –0.8% 
  • U.S. Producer Price Index released 3/14/24, prior +0.3% 
  • U.S. Consumer Sentiment (prelim) released 3/14/24, prior 76.9% 

In the current market landscape, the stock market and the broader economy demonstrate robust performance buoyed by several factors. Healthy corporate earnings bolstered by resilient consumer spending, economic productivity gains, and increased business technology spending are driving equities to continued new highs. Additionally, recent data pointing to a soft landing for the economy continues to provide a supportive backdrop, instilling confidence among investors. With a healthy labor market combined with the prospects for lower rates later this year, the overall economic and market outlook remains optimistic. It should provide help to the housing market. However, prudent risk management and close monitoring of potential inflationary pressures, geopolitical tensions, and trade disputes remain essential. Overall, the positive momentum in both the stock market and the economy reflects a favorable environment for investors.

In navigating volatile markets, it is important to maintain a long-term perspective grounded in the fundamentals of the economy and industry-leading companies. While short-term fluctuations and unforeseen challenges may arise, staying committed to well-thought-out investment strategies is key. As we move forward, let us remain optimistic about the future and recognize that overly emotional markets often pave the way for opportunities and growth.

Current Market Observations

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By: Chief Investment Officer, William Henderson

The verdict is still out on which city is happier at this point: Kansas City for clinching another Super Bowl victory or Wall Street for closing the S&P 500 Index over 5,000 for the first time in history. Given the historic volatility offered up by Wall Street, we would take the permanence of the Super Bowl victory. However, last week proved to be another winning week for the markets, with each major market index closing higher. The Dow Jones Industrial Average was barely higher by +0.04%, while the S&P 500 Index was +1.37% and the NASDAQ higher by +2.44%. Keeping with the Super Bowl theme here, equity markets seem much more content thinking about wins than losses, and the thoughts of a recession have now moved to the way back burner. Readers of The Weekly Commentary know we have believed in the strength of the US economy for well over a year now and still believe we are in a growth phase, albeit potentially trending downward, but slowly. Fixed income markets performed poorly last week, with the 10-year U.S. Treasury bond yield increasing by 14 basis points to 4.17%.

U.S. Economy 

As mentioned above, the S&P 500 Index, widely understood to be a fair gauge of large capitalization stocks, closed above 5,000 for the first time in history. This is important because it truly shows the strength and resilience of the U.S. economy. See Chart 1 below from Valley National Financial Advisors and Y Charts showing the S&P 500 Index and the U.S. Gross Domestic Product since 1940. Market prognosticators and experts love to talk about the “Wall of Worry” or “the coming recession,” neither of which really matters over the long term, as you can see from the chart. The U.S. consumer, who continues to be gainfully employed, spends prolifically and churns out massive economic activity as a result. Our economy is consumer-driven, and overall, consumers are healthy, cash-rich, eager to spend, shop, and travel. If Punxsutawney Phil is correct and spring comes soon, we should continue to see healthy economic activity in the U.S.

Patrick Mahomes was the Super Bowl LVIII MVP, but the Wall Street MVP is the U.S. Consumer.

Policy and Politics 

Washington seems content to flounder and argue rather than pass any meaningful legislation regarding the border crisis or additional aid to Ukraine or Israel. With the presidential election starting to take center stage, we believe Washington will be less likely to pass anything not directly tied to the important government funding bill coming in March. Meanwhile, Fed Chairman Jay Powell is marching to his own drum chorus and staying put on rate cuts at least through March 2024. All the main Fed speakers that were out last week parroted Chairman Powell’s message: “We need to see inflation come down a bit more to make sure we are not cutting rates too soon.” This week, we will see important inflation data that will give the FOMC (Federal Open Market Committee) their sought-after data.

What to Watch This Week 

  • U.S. Core Consumer Price Index YoY for Jan ’24, released 2/13/24, prior 3.90% 
  • U.S. Inflation Rate for Jan ’24, release 2/13/24, prior 3.35% 
  • U.S. Job Openings Total Nonfarm for Jan ’24, release 2/14/24, prior 9.026M 
  • U.S. Core Producer Price Index YoY for Jan ’24, released 2/16/24, prior 1.76% 

New records are reached every year whether in sports, industry, or Wall Street. We love to see records broken as much as the next person, but the real story is the one where investors stick to their long-term investment plan thereby building truly generational wealth. There are plenty of reasons to expect equity markets to grow this year but there are always risks. Risk drives returns, and the management of risk over prolonged periods increases returns. The goal of a true investor is to increase returns while managing and limiting risk. Reach out to your financial advisor at Valley National Financial Advisors for assistance. 

The Numbers & “Heat Map”

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Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five- and 10- year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Mortgage Bankers Association.

MARKET HEAT MAP

The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade key economic conditions that we believe are of particular importance to investors.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

Current Market Observations

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Equity markets notched another modest win last week, with all major indexes reporting gains (see year-to-date numbers below). We typically only point out the major indexes here at Valley National Financial Advisors, but last week saw gains in small capitalization stocks, a sector left out of this year’s market rally. As measured by the Russell 2000 Index, small caps gained +5.5% last week, which also shifted their year-to-date return into positive territory at +3.5%. A rally in small-cap stocks has been long overdue as most of the big gains this year have been in large-cap and even mega-cap stocks like the “Magnificent Seven.” An equity market rally balanced across all sectors and includes deep depth and breadth of all capitalization stocks rather than just large or mega-cap is healthier and more sustainable over longer periods. Bonds also continued their rally, with the 10-year U.S. Treasury falling 18 basis points to close the week at 4.44%. 

US Economy 

Last week’s equity gains were precipitated by the inflation data released mid-week. The U.S. Inflation Rate fell to 3.24% for October, down from an August 2022 high of 9.06%. See Chart 1 below from Valley National Financial Advisors and Y Charts showing the U.S. Inflation Rate and the U.S. Core Producer Price Index. While the U.S. inflation rate is not yet at the Federal Reserve’s target rate of 2%, the rate has come down dramatically. Furthermore, as we have stated many times here at Valley National Financial Advisors, interest rate hikes take time to work their way through the economy; therefore, even without further rate increases, the inflation rate should continue to track downward from here, given all the tightening that has occurred over the past 18 months. This view, shared by most economists, confirms that the Fed will remain on the sidelines, refraining from further intervention and instead watching and interpreting the data. 

Policy and Politics 

We have talked about global turmoil often and how global issues create uncertainty and fear—both of which markets hate. The Ukraine/Russia War continues to languish well into its second year. Further, the Israel/Hamas War shows no signs of abating. Thankfully, last week’s APEC Summit in San Francisco and the meeting of Chinese President Xi Jinping and President Biden may help to revive the recently cool relations between China and the U.S., the world’s two largest economies. Both countries are moving past pandemic-related inflation periods and experiencing growing economies, so healthy relationships rather than trade wars or tariff spats are important going forward.

What to Watch 

  • We have a Thanksgiving Holiday shortened trading week so Wall Street will be quiet but Main Street will be all buzz on Friday as the Holiday Season will kick off with Black Friday sales hitting the retail space. Next week Cyber Monday starts and by the end of the week we will have some idea of the consumer’s appetite for shopping and spending as many retailers will report 3rd quarter earnings.  

Everyone agrees that the U.S. has avoided a recession in 2023, and the outlook for 2024 is starting to look equally rosy. We remain cautiously optimistic about the markets and the economy, as we have been for over a year. The Fed may be done with interest rate hikes, but even if more hikes are coming, they will be modest, if at all, and minimally impactful. Investors have been rewarded this year for staying the course and remaining invested, a path that is often painful. According to the Nation Retail Federation, consumer spending is expected to be 3-4% higher this holiday season. The U.S. consumer has remained resilient all year and continues to support the economy. Reach out to your financial advisor at Valley National Financial Advisors for help and advice, but more importantly, enjoy the Thanksgiving Holiday Weekend.

Current Market Observations

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Equity markets posted mixed results last week, with the Dow Jones Industrial Average notching a +2.08% return, the S&P 500 Index moving higher by +0.69%, and the NASDAQ Index trailing the broader markets with a –0.57% return for the week. The broadening in equity market returns beyond simply technology stocks has continued for several weeks. This move has been expected as better valuations existed outside of the “magnificent seven” tech stocks that have thus far carried most of the gains in 2023. Year-to-date returns remain indicative of their expected risk levels, with the Dow Jones Industrial Average at +7.54%, the S&P 500 Index at +19.24%, and the tech-heavy NASDAQ at +34.69%. Fixed income markets were largely unchanged on the week, with the 10-year US Treasury Bond moving higher by three basis points to close the week at 3.84%.

Global Economy 

The Federal Open Market Committee (FOMC) meets this week, and most analysts are expecting another +0.25% rate hike, which will put the Fed Funds rate at 5.50% from 0.00%-0.25% at the start of 2022. We expect the Fed will be winding down its recent aggressive rate hiking strategy, which was related to spiking inflation in the United States and elsewhere. See Chart 1 from Valley National Financial Advisors and Y Charts showing the Fed Funds Rate and the U.S. Inflation Rate. The recent U.S. Inflation reading was 2.97%, down from over 9.00% in July 2022, so the Fed’s strategy is clearly working, and their target inflation rate of 2.00% is finally within reach. Still, we expect the path to 2.00% will be lumpy, slower, and longer than the path from 9.00% to 3.00%. 

U.S. Economy & Market Outlook 

Washington is on break until after Labor Day, and that has historically been “good news” for the markets because lawmakers are away and, therefore, unable to impact markets with harmful policies or procedures negatively. After calling for a recession in 2023, as many economists and “market experts” did in 2022, that same group has now walked back their predictions and pushed off any recession or soft-landing until well into 2024. With that said the markets are now focusing on earnings. Thus far in 2023, corporate earnings have been healthy, but markets are forward-looking, and we expect new tailwinds for corporate earnings going forward. Tailwinds will include relief on expenses as inflation continues to abate, normal supply chain operation, and the end of further rate hikes by the Fed. For the past year, we have only had headwinds, and markets have held up well; tailwinds will bring new directions to the market, but again, expect volatility, as always.

What to Watch 

  • Monday, July 24th  
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.676/gal.) 
  • Tuesday, July 25th  
  • Case-Shiller Home Price Index: National at 9:00AM (Prior: 299.72) 
  • Wednesday, July 26th  
  • U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 9.824M) 
  • Target Federal Funds Rate Upper Limit at 2:30PM (Prior: 5.25%) 
  • Thursday, July 27th  
  • U.S. Real GDP (Gross Domestic Product) QoQ at 8:30AM (Prior: 2.00%) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.78%) 
  • Friday, July 28th  
  • U.S. Core PCE (Personal Consumption Expenditure) Price Index MoM/YoY at 8:30AM (Priors: 0.30% / 4.62%) 
  • U.S. Personal Income MoM (Month Over Month) at 8:30AM (Prior: 0.40%) 
  • U.S. Personal Spending MoM at 8:30AM (Prior: 0.10%) 
  • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 72.60) 

Equity markets continue to move higher, and the recent broadening of positive returns to cyclical stocks from only technology stocks adds to the breadth the market was lacking. Certainly, our antennas remain active any time the markets move higher with such muted volatility. The current VIX (Volatility Index) is 14.0, a near-record low. 2008/09 VIX measured 81.0 and 76.0 at the peak of the Pandemic. Many investors spent the first half of 2023 on the sidelines waiting for the recession that would never impact the market. Meanwhile, markets have steadily moved higher all year, and new tailwinds have emerged for corporate earnings in the form of lower expenses and a clearer path from the Fed on interest rate moves. Emergent consumer technologies like AI (Artificial Intelligence) might further impact expenses. Though the eventual impact of AI is unknown, one must pay attention to innovation and its potential global importance.

Heads Up!

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It’s been a while since the last stock
market correction has occurred; the summer of 2011 to be exact.  A
technical correction is defined as a price decline of at least 10% to a
security or market index following extensive price increases.  Technical
market corrections are not necessarily bad as they help deter “bubble” like
valuations. 

We regularly monitor economic
developments and still believe in the economic recovery and slow growth cycle.
We would advise not to be alarmed if a broad stock market correction were to
occur.  Accordingly, we have placed great care in the construction of the asset
allocation to reduce the downside in portfolios if a correction were to
occur.  The bond sleeve is designed to resist stock market volatility,
while the alternative strategies reduce your downside exposure by employing
various tools to hedge risks.  Equities are selected based upon risk
factors that are lower as compared to their peers.  It is our belief that,
through appropriate diversification, we can weather a correction while continuing
to achieve your long-term return goals.