Category Archives: The Markets

Current Market Observations

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The broader markets rallied last week, seeing through the noise of continued inflation concerns, a protracted war in the Middle East, and mixed third-quarter corporate earnings releases. Last week, the Dow Jones Industrial Average and the S&P 500 Index moved +0.79% and +0.45%, respectively, while the NASDAQ moved lower by –0.18%. In a classic “Flight-to-Quality” trade, U.S. Treasury bond yields fell as investors moved to safe Treasuries during a time of global conflict. The 10-year U.S. Treasury bond fell 15 basis points, ending the week at 4.63%. Even at this lower yield, investors are finally seeing “real” yields on Treasuries as the U.S. Inflation Rate has finally fallen lower than the 10-year U.S. Treasury bond yield. See Chart 1 from Valley National Financial Advisors and Y Charts. 

US Economy 

As mentioned above, while stubbornly staying above the Fed’s target rate of 2%, the U.S. Inflation Rate is now 3.70% (released last week). The U.S. Core CPI (Consumer Price Index) fell to 4.13% in September 2023 from 4.39% in August 2023. Chart 1 below shows the 10-year U.S. Treasury and two inflation measures. While inflation remains higher, the yield on the 10-year Treasury is slightly higher, thereby finally offering investors real, after-inflation returns. 

Higher interest rates continue to negatively impact growth stocks as those companies typically borrow money to expand operations or hire additional employees. As third-quarter earnings releases hit the tape, we will get a better picture of which firms and industries are best dealing with higher interest rates for longer. Large banks Citigroup, JP Morgan, and Wells Fargo all reported earnings better than expected as higher interest rates helped these banks as they continue to remain a bit stingy in passing on the higher rates to their depositors. 

A widening or global escalation of the Israel-Palestinian conflict could impact oil prices, but thus far, world oil prices have not been materially impacted. It is important to watch this event to see how various actors on the world stage choose sides. For example, the U.S. has moved the USS Gerald Ford carrier fleet to the region to support Israel. Of course, defense stocks (ex. Northrop Grumman, General Dynamics & Lockheed Martin) have modestly rallied because of the growing conflict.  

Policy and Politics 

Three government forces are working in the economy right now, and all are impacting the markets, pushing uncertainty and worry into prices:

  1. We have the Fed and its constant fight against inflation. Last week, Federal Reserve Bank Vice Chairman Philip Jefferson noted that higher long bond yields are doing a lot of the work for the Fed in slowing the economy, implying that there is no need for further rate hikes.
  2. U.S. Secretary of State Anthony Blinken is actively involved in the Israeli-Palestinian conflict, which clearly indicates the U.S. is willing to do whatever is necessary to support our allies in the region.
  3. We continue to see a circus in Washington, DC, as lawmakers fall over each other trying to elect a new U.S. Speaker of the House.

Taken together, these government forces are adding uncertainty and worry to the markets, which is quite the opposite of what we expect and desire from our leaders. 

What to Watch 

• U.S. Retail Gas Price for week of October 13, 2023, released 10/16/23, prior price $3.81/gallon.
• U.S. Housing Starts for September 2023, released 10/18/23, prior 1.283 million starts.
• U.S. Initial Claims for Unemployment for week of October 14, 2023, release 10/19/12, prior 209k
• 30 Year Mortgage Rate as of October 19, 2023, released 10/19/23, prior 7.57%
• Key Earnings releases to watch this week: Tesla, Netflix, Goldman Sachs, Lockheed Martin.

We pointed out the wall of worry above with confusion on interest rates, continuing global conflict, and a broken U.S. Congress. Meanwhile, the markets are moving slightly higher each week, and bonds finally offer “real” yields for investors. Instead of worrying about what is happening now, the markets are scaling the wall of worry and moving higher as they filter out the noise and see sectors like big tech, healthcare, and mega banks doing well, even given all the noise. It is easy to get mired down with worry and negativity – that is all we see on TV and hear from so-called experts, but the markets see the future and ignore the noise. Investors interested in creating long-term generational wealth should listen to the markets and ignore the TV. Reach out to your financial adviser at Valley National Financial Advisors for advice or questions.

Current Market Observations

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The equity market ended the week mixed as a rally in tech stocks propelled the NASDAQ and S&P 500 Index higher but failed to pull along the broader Dow Jones Industrial Average. For the week, the Dow Jones ended down 0.45%, the S&P 500 up 0.82%, and the NASDAQ higher by 2.26%. The focus remained heavy on the Federal Reserve to see what monetary policy would come out of their Jackson Hole conference, and spoiler alert, Chairman Powell implied that rates would remain elevated until inflation approaches the 2% target and maintains that level. Across the pond, the Eurozone is struggling to combat inflation, which is still above 5%, suggesting the ECB may have to be more aggressive in its policymaking. Finally, the effects of China’s post-pandemic slowdown are beginning to be felt by trade partners and are causing a net detraction in global growth. 

Global Economy 

Federal Reserve policymakers met last week in Jackson Hole for their annual conference, focusing on monetary policy. Fed Chair Jerome Powell said that the central bank is ready and willing to continue raising rates if inflation does not sustainably trend down towards its 2% target. U.S. inflation printed last month at 3.18%, while it peaked last August 2022 at 9.1%. Remember that the Federal Reserve raised rates consistently in 2022 and through most of 2023—just recently pausing its tightening cycle, which greatly aided in bringing inflation down to 3.18% from 9.1% during that time period. While we have seen some commentary suggesting that the Fed will begin cutting rates by the end of the year, the news from Jackson Hole suggests that we may be in for an extended period of higher rates through at least mid-2024. Chart 1 below shows U.S. quarter-over-quarter (QoQ) GDP plotted against personal consumption QoQ.   

Chart 1: 

While the U.S. received somewhat clear direction from the Fed last week, Europe faces relative silence from Christine Lagarde and the European Central Bank (ECB) leading up to the bank’s Sept. 14th meeting. Inflation has continued to run rampant in the Eurozone and is the core focus of the ECB’s data-dependent policymaking. For reference, EU core inflation (ex-Energy) remains above 5% versus the central bank’s 2% target (the same as the Fed’s target). See Chart 2 showing European inflation data. However, the recent release of Europe’s Purchasing Managers’ Index (PMI) signaled the contraction of private sector activity, meaning there is now more significant downward pressure on inflation. See Chart 3 for both components and composite of PMI charted against each other from 2002 through the present.  

Chart 2: 

Chart 3: 

This year, China’s economy was supposed to drive 1/3rd of global economic growth. For reference, for every 1% gain in China’s growth rate, global expansion is boosted by 0.3%. Unfortunately, the country’s post-pandemic reopening has been fraught with weak data seeping into its trade partners. So far this year, more than $10B has been pulled from China’s stock markets in the longest stretch of net outflows in the country’s history. This does not mean there are no benefits from an economic slowdown in China. For example, China’s slowdown will depress oil prices and lower prices for exported goods. This is good news for other places, such as the U.S. and Eurozone, which are still battling elevated inflation and will benefit from falling Chinese demand. Chinese imports have fallen as demand dropped from pandemic-era highs. See Charts 4 and 5 for Chinese import data. Chart 6 belowshows export prices falling with the Producer Price Index (PPI) and import prices.  

Chart 4: 

Chart 5: 

Chart 6: 

What to Watch 

  • Monday, Aug. 28th  
    • 4:30PM – Retail Gas Price (Prior: $3.984/gal.) 
  • Tuesday, Aug. 29th  
    • 9:00AM – Case-Shiller National Home Price Index (Prior: 302.38) 
    • 10:00AM – Total Nonfarm U.S. Job Openings (Prior: 9.582M) 
  • Wednesday, Aug. 30th  
    • 8:30AM – Real GDP QoQ (Prior: 2.40%) 
    • 10:00AM – Pending Home Sales QoQ/YoY (Priors: 0.26% / -15.60%) 
  • Thursday, August 31st  
    • 8:30AM – Personal Income/Spending MoM (Priors: 0.31% / 0.55%) 
    • 12:00PM – 30 Year Mortgage Rate (Prior: 7.23%) 
  • Friday, Sept. 1st  
    • 8:30AM – Labor Force Participation Rate (Prior: 62.60%) 
    • 8:30AM – Nonfarm Payrolls MoM (Prior: 187.00K) 
    • 8:30AM – Unemployment Rate (Prior: 3.50%) 
    • 11:00AM – U.S. Recession Probability (Prior: 66.01%) 

Federal Reserve policymakers signaled that they remain vigilant in their fight against inflation with the end goal continuing to be a 2.00% target rate. We believe Chairman Powell sees the impact of the aggressive tightening in 2022-23 and hinted that the impact of these hikes has yet to be fully felt across the economy. We think a continued pause in rate hikes at the September FOMC meeting is plausible but, of course, all actions are data dependent. U.S. economic growth remains resilient with a solid jobs market which is boosting consumer spending. The bond market continues to modestly sell off, especially in the short end of the curve, but this move is also offering investors a yield component on bonds that we have not seen in many years. Summer is nearing a close, back-to-school shopping is underway or already done and Wall Street will be getting back from the Hamptons and elsewhere. “Sell-in-May and Go-Away” means traders and portfolio managers will be hitting the floor looking to cement positive returns for year-end bonus season. Also, pay attention to the shifting climate in China as this will impact the global economy. Please reach out to your advisor at Valley National Financial Advisors with questions or concerns.

Current Market Observations

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The Dow Jones Industrial Average ended the week down 2.21%, the S&P500 index lost 2.11%, and the NASDAQ fell 2.59%. Global stocks declined due to concerns about China’s economic conditions and rising global rates. Investors also continue to grapple with inflation concerns. Additionally, the CBOE Volatility Index (VIX) reached its highest level since May 2023 last week, indicating increasing market anxiety. The Federal Reserve is meeting in Jackson Hole, WY, this week—we will be watching this symposium to gauge the Fed’s policy stance going forward. We still believe that the Fed will be able to gently land the economy and avoid a recession despite being seemingly bombarded with news to the contrary.   

Global Economy

According to a recent survey, the projected 3Q GDP growth has surged to 1.8%, a notable increase from the earlier estimate of 0.5% in July, as seen in Chart 1 below. The economy’s strength is driven by resilient consumer spending, supported by recent retail sales data and a strong job market. Economists’ revised projections depict an average U.S. economic growth of 2% this year and 0.9% in 2024, exceeding previous estimates and aligning with more positive global forecasts. Despite inflation concerns, economists foresee a prolonged period of higher interest rates without any imminent rate hikes, as seen in Chart 2 below. The possibility of a rate cut has been pushed to the second quarter of the following year, reflecting their confidence in a more resilient economy. 

Chart 1:  

Chart 2: 

Chinese banks have maintained the key five-year loan prime rate (LPR) at 4.2%, defying predictions for a 15-basis point cut, while ten basis points reduced the one-year LPR to 3.45% (see Charts 3, 4). This unexpected move reflects China’s dilemma in balancing the need to stimulate economic growth with the imperative to ensure the banking system’s stability. The decision is seen as an effort to protect banks’ net interest margins and profitability, which are crucial for financial stability. The Chinese government is grappling with the challenge of bolstering borrowing demand amidst deflationary pressures and waning confidence, all while trying to avoid instability in the financial sector.  

Chart 3: 

Chart 4:  

What to Watch 

  • Monday, August 21st  
  • Retail Gas Price at 4:30PM (Prior: $3.962/gal.) 
  • Tuesday, August 22nd  
  • Existing Home Sales/MoM at 11:00AM (Priors: 4.16M / -3.26%) 
  • Thursday, August 24th  
  • Initial Claims for Unemployment Insurance at 8:30AM (Prior: 239k) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 7.09%) 
  • Friday, August 25th  
  • Index of Consumer Sentiment at 10:00AM (Prior: 71.20) 

While the market has had negative returns in the past few weeks, we remain cautiously optimistic about the U.S. economy and the markets for 2023. Please reach out to your contact at Valley National Financial Advisors with any questions.

Current Market Observations

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Markets ended last week mostly flat, with the Dow Jones Industrial average netting a 0.62% gain, while the S&P500 and NASDAQ lost 0.31% and 1.90%, respectively. Year-to-date returns on all three major indexes remain well in positive territory (see details below). In terms of economic data released last week, the Producer Price Index (PPI) increased month-over-month and year-over-year, which means it is still contributing to inflation despite it slowing considerably. While the Fed is waiting for solid economic data before announcing they won the inflation war, American Consumer’s inflation expectations are declining. The current inflation expectation rate is just 3.3% overall over the next year versus the 3.4% figure that was anticipated in July. Interest rates continued to increase last week, with the 10-year U.S. Treasury increasing seven basis points to end the week at 4.16%.

Global Economy 

U.S. Producer Prices increased in July due to rises in service categories, underscoring the challenges in managing inflation. The Producer Price Index for final demand and the core index, excluding food and energy, rose by 0.3% in July, slightly surpassing predictions. Factors like stabilizing supply chains, limited overseas demand, and shifting consumer spending towards services have eased producer-level inflation. However, recent oil price hikes are reintroducing inflationary pressures. Inflation in healthcare services accelerated, impacting key inflation measures. Recent consumer price data indicating minimal gains might deter the Federal Reserve Bank from raising interest rates in September. The Core PPI, which excludes volatile components like food and energy, increased only 0.3% in July and 2.4% annually, which is getting close to the Fed’s target rate of 2.00%. See the detailed charts below from Bloomberg.

The U.S. housing market has rebounded, recovering nearly $3 trillion in lost value from the previous year’s slowdown. A continued shortage of listings has driven up prices and elevated the total worth of U.S. homes to a record $47 trillion, as reported by Redfin Corp, see Chart 2 below from Redfin. The reluctance of homeowners to relinquish their lower-rate mortgages amid rising borrowing costs has resulted in only 1% of U.S. homes changing ownership this year, the lowest figure in a decade. 

Policy and Politics 

During the upcoming BRICS (Brazil, Russia, India, China, & South Africa) economic summit in South Africa, discussions will revolve around increasing the utilization of local currencies for trade among member states, including establishing a common payments system and potentially forming a technical committee to explore the concept of a joint currency. The focus is not on replacing the U.S. dollar as the global currency but rather on enhancing the use of domestic currencies to foster trade and counterbalance the dominance of the U.S. This is important to us to watch as some BRICS countries are part of the major move in U.S. manufacturing around nearshoring (moving offshore manufacturing physically closer to U.S. headquarters) and friend-shoring (moving offshore manufacturing to trade partners deemed more “business friendly”) since the massive supply chain disruptions that were seen during the pandemic. 

What to Watch 

  • Monday, August 14th  
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.94/gal.) 
  • Wednesday, August 16th  
  • U.S. Housing Starts / MoM at 8:30AM (Priors: 1.434M / -8.02%) 
  • U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 9.582M) 
  • Thursday, August 17th  
  • U.S. Initial Claims for Unemployment Insurance at 8:30AM (Prior: 248k) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.96%) 

As is typical in August, markets reach a calm/quiet period as Washington, DC, is on vacation with much of the rest of the country and world. Federal Chairman Jay Powell has slowly crafted his economic soft landing (battling inflation with higher interest rates and not sending the economy into a recession). However, the war is ongoing as inflation is still above the 2% target (U.S. Inflation Rate for July 2023 was 3.18%). As noted above, equity markets have slowly increased year-to-date, reflecting strong economic conditions, healthy labor and housing markets, and resilient consumers. Our mantra remains that investors can be cautiously optimistic for the remaining part of 2023.  

Current Market Observations

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Markets ended the previous week lower overall, with the DJIA down 1.11%, the S&P down 2.27%, and the NASDAQ down 2.85%. Despite these slight moves downward, year-to-date equity indices are trying to make up for a weak 2022, with the Dow up 7.04%, S&P up 17.75%, and NASDAQ up 33.53%–they still have a way to go before breaking even. Still, at least this is a move in the right direction as the Fed continues to work towards avoiding a recession. Last week, U.S. recession probability dropped by about 2% to 66.01%, while unemployment fell to another record low of 3.50%. We are in the camp that the Fed will avoid a recession with its current path of interest rate hikes. While a recession is possible, we still believe that the Fed is well on its way to pulling off its “soft landing, Goldilocks” scenario. 

Global Economy 

U.S. employment showed strong growth in July, accompanied by higher-than-anticipated wage increases, reflecting ongoing labor demand that is driving the economy’s renewed momentum. Nonfarm payrolls rose by 187,000, following a similar increase in June, with the unexpected decline in the unemployment rate to 3.5%, among the lowest in decades. The robust job and income gains suggest the economy can withstand rapid interest rate hikes aimed at curbing inflation, boosting consumer confidence, and potentially supporting spending and growth. Despite signs of wage growth slowing down due to labor supply and demand balancing after pandemic-related shortages, service providers, particularly in healthcare, financial activities, and construction, saw increased employment. The data, combined with relatively low inflation, suggest the Federal Reserve can manage price pressures without triggering a recession, influencing its upcoming decisions on interest rates. However, challenges remain, including potential future rate hikes and managing inflation, especially with the impending resumption of student loan payments. While President Biden’s policies have spurred growth, rising debt prompted a credit rating downgrade by Fitch Ratings.

Fitch Ratings’ downgrade of U.S. government debt from AAA to AA+ has elicited criticism from both Washington and Wall Street, despite concerns over the nation’s swelling fiscal deficits and their potential impact on markets, the economy, and the upcoming presidential election. The downgrade comes after Fitch had previously warned of such a move due to debates over raising the debt limit. The downgrade was attributed to the expectation of deteriorating finances over the next few years due to tax cuts, new spending, economic shocks, and political gridlock. Treasury Secretary Janet Yellen criticized the timing and called the downgrade “arbitrary” and “outdated,” while market reactions were mixed, with bonds staying relatively stable but risk-sensitive assets taking a hit. The downgrade underscores the worsening U.S. fiscal outlook, although investors are likely to view it as a medium-term concern. The political fallout and debates over the downgrade are expected to continue through the 2024 election. Fitch’s action increases the U.S.’s debt vulnerability and projected debt-to-GDP ratio, raising concerns about the nation’s resilience to economic shocks. Despite this, the market’s reaction remains uncertain, as the downgrade could lead to increased safe-haven buying of U.S. Treasuries and the dollar.

A surge in government bond selling intensified on Monday due to concerns about potential further interest rate hikes, leading to a rise in 30-year German bond yields to their highest level since 2014 and a six-basis point increase in similar-maturity Treasury yields. Although US equity futures saw a modest increase, investors remained wary as Federal Reserve Governor Michelle Bowman’s comments over the weekend hinted at the necessity of additional rate hikes to curb inflation. Anticipation for upcoming US inflation data added to market uncertainty, with the consumer price index reading expected to show a 0.2% rise in July, marking the smallest consecutive gains in 2.5 years. Despite this, stock trading remained relatively subdued, with European stocks retreating and German industrial output hitting a six-month low, signaling economic weakness. 

What to Watch 

  • Monday, August 7th 
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.869/gal.) 
  • Tuesday, August 8th  
  • U.S. Trade Balance on Goods and Services at 8:30AM (Prior: -68.98B USD) 
  • Wednesday, August 9th  
  • U.S. Crude Oil Stocks WoW at 10:30AM (Prior: -17.05M bbl.) 
  • Thursday, August 10th  
  • U.S. Consumer Price Index MoM/YoY at 8:30AM (Priors: 0.18% / 2.97%) 
  • U.S. Inflation Rate at 8:30AM (Prior: 2.97%) 
  • U.S. Initial Claims for Unemployment at 8:30AM (Prior: 227,000) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.90%) 
  • Friday, August 11th  
  • U.S. Producer Price Index MoM/YoY at 8:30AM (Priors: 0.14% / 0.13%) 
  • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 71.60) 

Current Market Observations

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Week by week, the mythical “Goldilocks” scenario plays out, where the Fed tackles rampant inflation with higher interest rates and slows the economy as a result, but not so much so that we roll into a recession – this is also commonly called a “soft-landing,” and Fed Chairman Jay Powell, like others, is seeking this outcome. All the while, equity markets continue to quietly move higher as they did last week, with gains across all three major market indexes. For the week, the Dow Jones Industrial Average gained +0.7%, the S&P 500 Index added +1.0%, and the NASDAQ notched a gain of +2.0%. Year-to-date gains remain comfortably solid, with the Dow Jones Industrial Average at +8.2%, the S&P 500 Index at +20.5%, and the tech-heavy NASDAQ at +37.4% for the year. 

US Economy 

Last week we showed how inflation has moved from 9.1% in July 2022 to just under 3% a year later. This sharp drop in inflation is a direct result of the Federal Reserve raising interest rates from a range of 0.00-0.25% to 5.25%-5.50% in just under 18 months. A move this fast and this steep in interest rates, which immediately inverted the yield curve, typically slows the economy so much that a recession is the result. We at TWC have consistently stood against this typical pattern this year. Our premise was based on a solid labor market as evidenced by an unemployment rate at a paltry 3.6%, healthy consumer spending, banks continuing to lend with healthy balance sheets, corporate earnings still in the green column, and the US housing market still growing. 

Markets continue to rally, seeing beyond the short-term concerns and instead looking ahead and understanding the fundamentals driving prices higher: we are near the end of the interest rate hikes, inflation is abating, and economic growth is accelerating rather than slowing. Last week, the Atlanta Fed raised second-quarter US GDP (Gross Domestic Product) estimates to +2.4% from +2.0%. See Chart 1 belowfromtheFederalReserveBankofSt. Louis, showingtheU.S. GDPestimate. The third quarter 2023 estimate for US GDP growth is +3.5%. Fed Chairman Jay Powell certainly seems to be getting his “Goldilocks” ending. 

Policy and Politics 

Washington is thankfully on vacation until after Labor Day so we can relax and not worry that new restrictive legislation will be dumped on consumers or corporations. Instead, we have a quiet period where the markets and economy will digest the news cycle this week, including earnings reports from some of the most important companies, including Apple and Amazon.com. Other important global news is coming from China, where further government stimulus was announced. 

What to Watch 

  • U.S. Job Openings Non-Farm for June 2023, released 8/1/23, prior level 9.824M job openings. 
  • U.S. Labor Force Participation Rate for July 2023, released 8/6/23, prior rate 62.6% 
  • U.S. Unemployment Rate for July 2023, released 8/6/23, prior rate 3.6% 

The “Goldilocks” scenario certainly is plausible, and last week we saw positive GDP growth along with declining inflation. All the while, companies continue to report favorable earnings, and the buzzwords of the future remain “artificial intelligence,” or AI. AI is supposedly turning out to be the panacea of everything that is wrong with the world, from healthcare to education to global climate change. We at VNFA remain cautiously optimistic about the economy and the financial markets, basing our assumptions on the American Consumer. Volatility remains calm, and Mr. Powell may get his soft landing, but vigilance and caution should always be used. Reach out to anyone at Valley National Financial Advisors for assistance. 

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.

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Falling inflation data, wide-spread market returns, and the reluctant acceptance by market participants that the Fed’s “Goldilocks” scenario of an economic soft-landing sparked solid returns across stock and bond markets. Last week’s markets finally showed signs of the broadening in equity returns we spoke of last week, with each major index returning weekly gains of more than 2%. Leading the way was the NASDAQ composite at +3.32% for the week, while the S&P 500 Index was up +2.42%, and finally, the Dow Jones Industrial Average notching a gain of +2.29%. The data below shows Year-to-date returns remain spread apart on the averages; however, each major index is up on the year. Meanwhile, US Treasury Bonds rallied (prices rose), with the 10-year US Treasury Bond falling 19 basis points to end the week at 3.83%.   

US Economy 

As mentioned above, the Bureau of Labor Statistics reported that the U.S Core Consumer Price Index and the U.S Core Producer Price Index, the Fed’s preferred measures of inflation, moved lower month-over-month and year-over-year. Chart 1 below from Valley National Financial Advisors and Y Charts shows Core Producer Price Index, Consumer Price Inflation, and the Target Fed Funds Rate. Chart 1 was the solid proof markets needed that inflation was falling due to the Fed’s aggressive interest rate hiking. This was important because, at the same time, the economy is still growing, companies are continuing to make money as Earnings Per Share remain positive, and the unemployment rate remains at a decades-low near record 3.60%.   

Global Markets 

Last week’s gains in the equity markets were widespread. We believe this to be an important inflection point in the markets as equities beyond the “Big Seven” (Apple, Amazon. Com, Google, Microsoft, Meta, Nvidia, & Tesla) showed signs of positive momentum, which was needed to broaden out the technology-centered rally thus far in 2023. Chart 2 below from FactSet and Edward Jones breaks down returns year-to-date and valuations year-to-date. The broadening in market momentum shows room for further widening the breadth of returns as other sectors beyond the “Big Seven” participate going forward. We would not be surprised if the ‘Big Seven” continued to dominate market returns. Still, other sectors are poised to participate as the Fed is near the end of its rate hiking cycle, which was a significant headwind to markets. Inflation may soon be solidly behind us. 

What to Watch 

  • Monday. July 17th  
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.663/gal.) 
  • Tuesday, July 18th  
  • U.S. Retail and Food Service Sales MoM at 8:30AM (Prior: +0.34%) 
  • U.S. Industrial Production MoM at 9:15AM (Prior: -0.16%) 
  • U.S. Business Inventories MoM at 10:00AM (Prior: +0.16%) 
  • U.S. Wholesalers Inventories MoM at 10:00AM (Prior: -0.10%) 
  • Wednesday, July 19th  
  • U.S. Housing Starts MoM at 8:30AM (Prior: +21.72%) 
  • Thursday, July 20th  
  • U.S. Initial Claims for Unemployment Insurance at 8:30AM (Prior: 237,000) 
  • U.S. Existing Home Sales MoM at 10:00AM (Prior: +0.23%) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.96%) 

The “Goldilocks” soft-landing (cooling inflation while not killing the economy) may be playing out, yet we will not know until after all the data has been entered into the history books. We know today that inflation has come down, people have remained gainfully employed, and companies are making money. These factors have helped to push markets higher this year. Further, beyond equity returns in the technology sector and positive momentum in broadening sectors, bonds offer investors returns we have not seen in over ten years. The 10-year US Treasury Bond currently yields 3.83%. See Chart 3 below from Valley National Financial Advisors and Y Charts.   

A risk-appropriate balanced portfolio with a broad selection of equities and bonds, while loaded with inherent volatility, still offers returns that, over time, will beat inflation and help investors create generational wealth. Contact your financial professional at Valley National Financial Advisors for assistance or questions. 

Current Market Observations

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Equity markets were mixed last week, with the Dow Jones Industrial Average falling –1.1% while the S&P 500 Index (+0.1%) and the NASDAQ (+0.5%) posted modest gains. Bond yields rose, and the 10-year US Treasury moved above 4.00% again, closing the week at 4.06%. Strong labor market data released last week and a slight drop in the unemployment rate helped push yields higher. There was a bit of conflicting data, with the ADP jobs report showing +479,000 new jobs and the BLS (Bureau of Labor Statistics) showing +209,000 new jobs. While conflicting data for sure, both figures show that we continue adding jobs while inflation slips downward. This recent data certainly gives the Fed the cushion to continue increasing rates as we move into the summer. See charts and data below.

US Economy 

As mentioned above, the US Unemployment Rate continues to fall, hitting 3.6% last week; see Chart 1 below from the Federal Reserve Bank of St. Louis. This is important because it pushes the case for the mythical “soft-landing” every Fed Chair hopes for when raising rates, as Chairman Jay Powell had done over the past 18 months. A “soft-landing” refers to the ability to slow the economy by raising rates just enough to kill inflation but not destroy demand so much that the economy rolls into a recession. Thus far, Chairman Powell is succeeding. An unemployment rate of 3.6% shows that the labor market remains resilient. 

Yields on bonds continued moving higher as markets and investors accepted the fact that higher short-term rates are coming; see Chart 2 below from Valley National Financial Advisors and Y Charts showing the 2-year and 10-year US Treasury yields. The move higher last week in bond yields confirmed expectations that the Fed will raise rates by +0.25% at their next two meetings. While higher rates will continue to slow the economy, we doubt an additional +0.50% will do much, given that markets have already easily digested +5.25% in rate hikes. This is the “soft-landing” Chairman Powell is shooting for – lowering inflation, keeping the labor market alive, and not pushing the economy into a recession.

What to Watch 

  • Monday, July 10th  
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.643/gal.) 
  • Wednesday, July 12th  
  • U.S. Inflation Rate at 8:30AM (Prior: 4.05%) 
  • U.S. Core Consumer Price Index MoM/YoY at 8:30AM (Prior: 0.44% / 5.33%) 
  • Thursday, July 13th  
  • U.S. Initial Claims for Unemployment Insurance at 8:30AM (Prior: 248,000) 
  • Natural Gas Storage Change at 10:30AM (Prior: 72.00B cf.) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.81%) 
  • Friday, July 14th  
  • U.S. Export Prices MoM/YoY at 10:00AM (Prior: -1.85% / -10.13%) 
  • U.S. Import Prices MoM/YoY at 10:00AM (Prior: -0.64% / -5.94%) 
  • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 64.40) 

This week we will get a fresh look at the U.S. Inflation Rate (prior 4.05%) to see if we are moving closer to the Fed’s 2.00% target rate. While most economists have finally walked away from their predictions of a recession in 2023, they have now moved into 2024. We are watching important consumer data as consumer and consumer spending makes up 65-75% of the U.S. economy. Importantly, small indicators like restaurant activity and credit card delinquencies are showing signs of weakening. While certainly expected in a slowing economy, it remains important to us to watch this data. We remain cautiously optimistic about the markets and economy for 2023, hoping like Chairman Powell, that we see a “soft landing.” Contact anyone at Valley National Financial Advisors with questions about this report.

Current Market Observations

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Although last week’s jobs report showed a slowing in hiring during March 2023, equity markets posted another positive week across all three major market indexes, with the Dow Jones Industrial Average leading the way at +1.91% for the week ended April 7, 2023. Meanwhile, the S&P 500 Index notched a decent +1.34% for the week, while the NASDAQ returned +0.62%. Bond prices increased during the week but only modestly, with the 10-year U.S. Treasury bond falling four basis points to close the week at 3.39%. As recently as October 2022, the yield on the 10-year U.S. Treasury was 4.25%, marking a shocking move in rates due to still-unfounded recessionary fears and a clear flight to quality after the mini-banking crisis we saw in March as Silicon Valley Bank & Signature Bank failed.

Last Friday’s employment report from the Bureau of Labor Statistics showed the U.S. added 236,000 nonfarm payrolls in March, below the median economists’ forecast of 239,000 and down from February’s revised figure of +311,000, see Chart 1 below. Oddly, the unemployment rate moved a bit lower to 3.5% from 3.6%, and the labor force participation rate increased from 62.5% to 62.6%. At VNFA, these moves are modest and still point to a strong labor market by any historical measure. We continue to believe the U.S. labor market remains a strong point continuing to underpin the economy.

Investors understand the current objective of Fed Chairman Jay Powell is combatting inflation which peaked last summer at 9.06% and has since tapered to 6.04%, see Chart 2 below. Chair Powell has raised interest rates at a near-historic pace, and last year’s markets showed the result of that with poor returns across all sectors. As inflation comes under control and further rate hikes fade into the sunset, we expect markets to moderate but remain volatile. 

What to Watch

  • Monday, April 10th
    • U.S. Wholesale Inventories MoM at 10:00AM (Prior: -0.42%)
    • U.S. Retail Gas Price at 4:30PM (Prior: $3.606/gal.)
  • Wednesday, April 12th
    • U.S. Consumer Price Index MoM/YoY at 8:30AM (Prior: 0.37% / 6.04%)
    • U.S. Core Consumer Price Index MoM/YoY at 8:30AM (Prior: 0.45% / 5.53%)
  • Thursday, April 13th
    • U.S. Producer Price Index MoM/YoY at 8:30AM (Prior: -0.15% / 4.58%)
    • U.S. Core Producer Price Index MoM/YoY at 8:30AM (Prior: -0.00% / 4.40%)
    • 30 Year Mortgage Rate at 12:00PM (Prior: 6.28%)
  • Friday, April 14th
    • U.S. Export Prices MoM/YoY at 10:00AM (Prior: 0.20% / -0.85%)
    • U.S. Import Prices MoM/YoY at 10:00AM (Prior: -0.14% / -1.05%)
    • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 62.00)

Equity markets finished the week slightly higher, while treasury yields fell slightly. Last week, the BLS (Bureau of Labor Statistics) labor report was right on target, missing median expectations by only a few thousand jobs and indicating a strong labor market as participation increased and the unemployment rate decreased. However, the strong jobs market is still running a bit contrary to the Fed’s rate-hike path. It was expected that the historic pace of rate increases would negatively affect workers and put many out of jobs, which has yet to be seen. Despite the continued strength in this area, inflation has trended downwards from a peak of 9.06% and is currently down to 6.04%, indicating that the Fed is putting up a good fight. We believe the path to 4% is ahead of us, while returning to the 2% average target may take years longer than initially expected.