06/17/2024 — Key takeaways:
- Equity markets continued their march higher, closing at record highs 29 times this year.
- Inflation data was seen as encouraging by investors, pricing in a “Goldilocks” scenario.
- The FOMC voted to keep rates unchanged, though Chair Powell’s comments were viewed as dovish.
Drivers of market movement
The impressive run for equity markets continued this week, with the S&P 500® Index closing at record highs in four straight sessions (29 times this year), returning 14% to date in 2024. Easing inflation data paired with softening macro data is shifting expectations for Fed rate cuts, with the Fed Futures curve embedding two rate cuts this year following Wednesday’s Federal Open Markets Committee (FOMC) announcement. The bond market also saw aggressive buying, with the 10-year Treasury yield falling to a two-month low at 4.21%, down 0.22% this week. Risk metrics are remarkably calm, with credit spreads near cycle lows and volatility metrics calm. Investor sentiment, financial conditions, momentum, and the put/call ratio reflect investors’ optimism, while market breadth remains top-heavy. Share repurchases have been a tailwind for markets, with buybacks at their second-highest on record last week, though that will pause as we enter a seasonal blackout period until mid-July.
The primary pushback from the bears is the incredibly top-heavy nature of the market, with the market-cap-weighted S&P 500 Index outperforming the equal-weight by nearly 2% this week and almost 10% for the year. The S&P 500 Index hit record highs despite less than half of its members trading above their 50-day moving average and the five largest stocks accounting for half of the year-to-date gain (Nvidia alone has accounted for 32%). That group now accounts for a record 27% of the Index. The large-cap technology run broadened this week, driven by impressive gains in Apple, Broadcom, and Oracle. This performance gap has caught the attention of investors, with growth funds attracting $2 billion in the latest week, while value funds lost $3 billion.
Inflation data was the primary news driver this week, with encouraging reports on CPI and PPI calming investors’ fears and driving markets to record highs. Consumer price inflation was modestly lighter than expected, with the headline number up 3.3% from a year ago, lower than the 3.4% estimate and 3.4% in April. Despite the improvement, inflation has topped 3% for 38 straight months, well above the Fed’s 2% target. Excluding food and energy, core CPI rose 3.4%, below the 3.5% estimate and 3.6% last month. This is the softest reading in more than three years. Producer price inflation unexpectedly fell 0.2% in May, reversing the 0.5% surge in April. Compared to a year ago, headline PPI rose 2.2% and core PPI rose 2.3%; additionally reinforcing the easing inflation trends seen this week, import and export prices unexpectedly fell in May, driven by energy and food.
The FOMC meeting this week unsurprisingly ended with no change in policy, keeping the Fed Funds range at 5.25-5.50%. The statement had few changes, highlighted by a mention of “modest further progress” toward the 2% inflation target from “a lack of further progress” in May, which was interpreted as dovish by investors. The refreshed “dot plot” brought the expected cuts this year to just one from three previously, pushing those cuts into 2025 and 2026. In the press conference, Chair Powell noted the improvement in inflation data but reiterated that the group needs to see a pattern of improvement before gaining the confidence to cut. The Fed Futures curve reacted dovishly, embedding two cuts this year compared with one following May’s meeting.
Economic data is slowing, though at a pace acceptable to investors, with few signs of an impending recession. Comments from retailers have been cautious this month, indicating increasing price sensitivity, though American Express and Capital One both commented this week that the consumer is holding up. The labor market is sending mixed signals, with last week’s blowout nonfarm payroll report juxtaposed against unemployment claims at the highest level in nine months. The University of Michigan’s reading on consumer sentiment surprisingly fell to a seven-month low on stubborn prices. The Atlanta Fed’s GDPNow™ model forecasts second-quarter growth at 3.1%, while the Citigroup Economic Surprise Index is at -14. The Bloomberg Recession Probably Forecast currently sees a 30% chance of a recession in the next 12 months, down from 65% last July.
Details on performance
Softer inflation data reignited investor optimism, boosting markets this week. The S&P 500 Index gained 1%, while the Dow Jones Industrial Average was down less than 1% and the NASDAQ Composite Index added 3%. Growth indexes outperformed value by 2%, while large caps outperformed small caps by 2%. Leading sectors for the week included tech, health care, and communication services, while financials, energy, and consumer staples lagged. Volatility remains low with the VIX closing at 12 while trading volume was average.
Domestic markets outperformed global markets, with the MSCI EAFE® Index and the MSCI Emerging Market® Index both underperforming the S&P 500 Index. Asian markets were mixed following mixed economic data, with Taiwan up 3%, South Korea up 1%, and China up 1% as well. European markets were weak, after election results stirred investor uncertainty, with France down 10%, Germany down 6%, and the UK down 3%. Latin America was also weak, with Mexico down 4%, Brazil down 6%, and Chile down 6% as well. The trade-weighted dollar index was up by 1% and remains up by 3% for the year.
CPI data came in softer than anticipated, with the 10-year Treasury yield down 0.23% to 4.20%. The 2-year yield fell by 0.17% to 4.69%, with little movement of the spread between the two yields. Credit spreads remained tight. Commodity prices were higher with the S&P Goldman Sachs Commodity Index up 2% for the week and 8% for the year. Crude prices are up 3% following forecasts for a tighter market. Precious metals, including silver and gold, were both lower by less than 1%. Agricultural commodities were mixed.
Investors continue to allocate assets in a balanced way, with risk assets showing positive returns. Equity funds and ETFs attracted $6 billion in the latest week, gaining for the eighth week, led by growth funds. Bond funds added $10 billion, with investment-grade funds adding $8 billion in a 33-week winning streak. Cash continues to take in the bulk of flows, adding $40 billion for the week, bringing the year-to-date total to $315 billion. Investor sentiment is mixed, with the CNN Fear & Greed Index well below neutral at 38 on a scale from 0-100 despite markets hitting record highs. The AAII Sentiment Survey showed that bullish sentiment increased to 45% from 39% last week, while bearish sentiment decreased to 26%, down 6.5 percentage points from the previous week.
What to watch
A light week of data awaits, with retail sales and industrial production on Tuesday, housing starts on Thursday, and PMI data, existing home sales, and leading indicators on Friday.