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July 08, 2024

Beacon Weekly Investment Insights 7.8.24

Chief Investment Officer, John Longo, PhD, CFA, provides insights to guide you through changing market conditions. Please read the full text below or download the PDF version.

The S&P 500 increased nearly 2% in a holiday shortened week to close at an all-time high. Performance last week was a microcosm of year-to-date performance (YTD). Growth, and especially technology stocks, led the way. For example, last week the Russell 1000 Growth Index increased 3.7%, the Russell 1000 Value Index increased 0.4%, and the Russell 2000 Index of small cap stocks fell 1%. Long-term interest rates declined modestly last week, with the benchmark 10-year U.S. Treasury Note falling 7 basis points, helping to push the Bloomberg Barclays Aggregate Bond Index back into positive YTD territory.

Stock market performance last week was another case of “bad news is good news.” More specifically, the bad news of weak economic data is often good news for the stock and bond markets since it often portends a future drop in interest rates. The forward-looking Institute for Supply Chain Management (ISM) Purchasing Manager Indexes (PMI) published last week both forecasted modest declines in future business activity. The ISM Manufacturing Index declined from 48.7 to 48.5, while a figure greater than 50 signifies expected expansion. The ISM Manufacturing Index has largely been below 50 for the past year and a half, but the market was surprised by the ISM Services Number also falling sharply from 53.8 to 48.8.

Last Friday’s nonfarm payroll or jobs report showed that the unemployment rate ticked up from 4.0% to 4.1%, another sign of economic weakness, despite the creation of 206,000 new jobs. The net result is futures markets are now pricing in a roughly 75% chance of an interest rate cut after the Federal Reserve’s Federal Open Market Committee (FOMC) meeting in September.

In company specific news, Tesla continued its recent surge after a rough start to the year. The electric vehicle pioneer leaped 27% last week on investor enthusiasm for its “robo taxi” service and after reporting vehicle production numbers that were better than expected. Embattled commercial aircraft manufacturer, Boeing, advanced nearly 2% last week after it announced it was acquiring parts maker Spirit AeroSystems in an attempt to fix some of its well documented quality control problems. At Beacon we focus on the fundamentals of a company and do not attempt to purchase meme stocks. However, we note that internet meme sensation Keith Gill, also known as “Roaring Kitty”, purchased a 6.6% stake in online pet retailer, Chewy. Owning over 5% of a company results in reporting requirements with the SEC, hence potentially moving Mr. Gill into the “activist” investor realm.

Turning to this week’s economic calendar, Federal Reserve Chair, Jay Powell will speak with the U.S. Senate on Tuesday and with the U.S. House of Representatives on Wednesday. Although it is almost a forgone conclusion that the Fed will hold short-term rates constant after its next meeting in late July, Powell’s commentary often moves markets. On Thursday the Consumer Price Index (CPI) report will be released and will be followed on Friday by the Producer Price Index (PPI), a measure of wholesale inflation. If either report comes in too hot it has the potential to further delay Fed rate cuts and negatively impact asset prices.

A measure of business confidence, the National Federation of Business (NFIB) Small Business Optimism Index, will be released on Tuesday. Since small businesses generate the bulk of new jobs in the U.S., it bears watching. On Friday the University of Michigan Consumer Sentiment Index will be released, which often provides a pulse on consumer spending. Also on Friday, JP Morgan will kick off another round of earnings reports. In short, it may be an eventful week in the financial markets in advance of the deluge of earnings reports that will be released next week.