Pillow Soft?

GeneralMarket Update
Pillow Soft?

, Pillow Soft?Markets prepared for the worst last week, but were pleasantly surprised by modest economic data, which provided additional support for an elusive “soft landing” for the economy. The S&P 500 was up 2.42%; the Dow Jones climbed 2.29%; and the NASDAQ propelled 3.32% higher. Interest rates weakened, when employment data was published, which led to the Agg being up 1.46%. Alternatives continued to be mixed, though, with Bitcoin futures down -0.44%, gold up 1.65%, silver up 8.19%, and oil up 2.11%.

U.S. equities have portrayed a divided story this year, with the largest of Tech playing the role of breakout performers, while smaller companies and GDP-driven companies have fallen behind. The year to date (YTD) total return of the major US stock indices highlight this divide, with the S&P 500 up 17.04%, the Dow Jones up 3.84%, the Russel 2000 up 8.55%, and NASDAQ up an impressive 32.60%. An important vantage point can be seen by comparing the S&P 500, which is market-cap weighted (larger companies make up a higher percentage), to the same S&P 500 if weighing each company equally. The “equal weight” S&P would be up “only” 7.96% YTD, while the historic flows into mega caps more than doubled the actual S&P index performance. A flight to what investors deem “safety” and the Artificial Intelligence boom have certainly fueled the large tech outperformance in the S&P. Traditionally, when economic activity begins to soften, investors are willing to pay a lot more for the potential for growth found in tech, relative to GDP-driven industries. That tide has begun to turn over the past few weeks.

It was economic data driving markets last week. Monday saw Consumer Credit SA (Seasonally Adjusted) come in significantly softer than expected, with non-real estate loans seeing $7.2 Billion extended vs $20.5 Billion expected. Wednesday brought CPI numbers with Core CPI (SA M/M) of 0.20% below the 0.30% expected, and headline CPI SA M/M came in similarly at 0.20% versus 0.30% expected. The softening of inflation continues the Federal Reserve’s narrative that the rate hike medicine is combating inflation. Then, on Wednesday, hourly earnings SA M/M came in at expectation of 0.40%, continuing to show labor force resilience. PPI data on Thursday continued the CPI narrative of waning inflation, coming in lower month over month and below expectations.

In the coming week, retail sales and housing data is on the docket in a relatively quiet week leading up to the FOMC meeting, where markets are pricing in what is expected to be the final rate hike of the cycle. The narrative is expected to shift towards how long rates stay elevated and the nature of the eventual rate decline. We expect markets to watch for any bumps in the night that might derail Fed policy.

In geo-political events, parts of Europe, Asia, and the United States continue to face a severe heat wave, while the northeastern United States experienced severe rain last week leading to several flash flood-related deaths.  As the war in Ukraine continues, Russia has announced its decision to exit the Ukraine grain deal that allowed Ukraine to export grain through the Black Sea. This comes as Ukraine attacked and damaged the Kerch bridge, which links Crimea and Russia, in hopes of disrupting the conduit for Russian military supplies. In the United States, most television and movie production has ground to halt as the SAG-AFTRA union representing actors joined the WGA writer’s strike in Hollywood over revenue sharing and AI impact disagreements with studios.

Last week saw strong equity performance across the US markets combined with a rally in bonds, as hope for inflation resolution increased. As confidence in a soft landing increases, we are seeing money flows move towards wise sector and security selections, as opposed to simply mega cap “safety” picks. This should bode well for actively managed portfolios! And, with portfolio values increasing, now is a great time to remember the call to give. ”In everything I showed you that by working hard in this manner you must help the weak and remember the words of the Lord Jesus, that He Himself said, ‘It is more blessed to give than to receive.’” – Acts 20:35

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