While financial conditions remain tight, economic data supports the bullish narrative of "hope." That narrative is "hope" the Fed will cease hiking rates. "Hope" that the economy will avoid a recession, and "hope" that earnings growth will accelerate into 2024.
An economic downturn remains one of the most significant risks to the stock market, along with interest rates. However, on Friday, Jerome Powell spoke from the Jackson Hole Summit. He delivered, as expected, a "down the middle" speech suggesting the Fed will remain focused on incoming data for any upcoming policy changes. Over the last several years, market reactions to Jackson Hole Summit speeches have been relatively normal, with the exceptions of 2019 and 2022.
This week we will discuss why I doubled my bond position in my personal account. That may seem odd, given that rates have continued to tick up this past week. Much of the recent increase was related to a knee-jerk reaction to the July FOMC minutes, which failed to show signs of an aggressive timeline to cut rates. Notably, the rate uptick only improved the fundamental backdrop of bonds versus stocks.
The market took a breather this past week as earnings season begins to wind down. Such was expected, as discussed in last week's commentary.
This week's debt downgrade by Fitch sent the media into a tizzy. However, it was just the catalyst needed to start the correction we have discussed over the last few weeks. As noted two weeks ago:
Patience has been hard to come by as stock prices continue trading higher. As shown below, the S&P 500 is set to close out its fifth straight month of gains. In addition to being up six out of the seven months this year, returns are unusually high, with the S&P advancing 18% year-to-date.
Earnings season is underway, and so far, corporate outlooks remain relatively upbeat, suggesting the economic cycle might improve. While it is too early to tell for sure, as we will discuss in more detail today, some evidence may support that view and the potential for the market to eclipse all-time highs by next year.
As we enter Q2 earnings season, we will discuss profits, earnings, and stock market returns in greater detail in the coming weeks. However, the big news this past week was the drop in the CPI inflation gauge, which sent stocks higher, breaking out of the recent trading range over the last couple of weeks.
This week's economic data sent confusing messages through the market. A stronger-than-expected ISM Services number suggests that no recession is on the horizon currently. As noted in the chart below, there has never been a recession since the turn of the century when services (which comprise 80% of the economy) are not in contraction.