This week, stocks and bonds traded range-bound. The large size factor continued to outperform Small, and there was limited factor and sector dispersion. Treasury yields were volatile but ultimately ended the week unchanged, with bonds remaining overbought territory after the recent drop in yields. Notably, WTI crude traded back above $80 per barrel.

This week’s performance was top-heavy as the size factor continues to shape equity returns. The Magnificent 7 propelled the S&P 500 and Nasdaq 100 to new all-time highs, with Technology as the top performer. This week’s note discusses this year’s top-heavy return profile and how it’s distorting headline returns.

This week, the Bureau of Labor Statistics released May’s employment data, which showed 272,000 jobs were added to the economy, exceeding the expected increase of 190,000 and the revised prior-month tally of 165,000. Conversely, the unemployment rate ticked up to 4.0%, versus economists’ outlook of 3.9% and the April level, which was also 3.9%

This week's data suggests that the Fed may be more hesitant to reduce interest rates over the near term due to robust manufacturing sales forecasts. If the US economy continues to expand without accelerating wage growth and inflation, stocks likely will gain further ground, though incrementally. The Federal Reserve's rate cuts would provide support, and we expect rates to be lower by the end of the year.

This week, stock market indexes cemented a full recovery from April’s pullback, reaching respective records. Fed Chairman Jerome Powell’s comments that short-term interest rates, currently in the range of 5.25%-5.50%, were more likely to fall than rise in the second half of this year most visibly supported share prices. A cooler inflation report, by way of the Consumer Price Index, for April backed this rate policy likelihood. 

This week, stock valuations began to recover after a negative April performance. Corporate earnings reported for the first quarter of 2024 have been healthy. The earnings season is winding down, and results have generally been better than investors on Wall Street had anticipated. Notably, many management teams appear more optimistic about business trends for the remainder of 2024 and into 2025.

This week’s initial estimates of 1Q24 GDP revealed a complex picture. At the start of the year, expectations were set for gradual declines in growth and inflation. However, the data showed a sharp deceleration in headline growth while inflation, as measured by the personal consumption expenditures price index (PCE), accelerated on a quarter-to-quarter basis. This has raised concerns about potential stagflation and its implications on interest rates and markets.

In recent weeks, uncertainty surrounding the macroeconomy and geopolitics has weighed down share prices, most visibly those of banks, semiconductors, and software companies, particularly small-cap stocks. Overall, price volatility has increased. In such an environment, investors would do well to stay with leading companies with proven earnings and cash-flow track records.

This week, the BLS reported that the Consumer Price Index (CPI) gained 0.4% on a monthly basis, which was stronger than what investors had anticipated and on par with the prior read. Investors are concerned that with inflation proving resilient, the Fed might decide to implement fewer rate cuts than hoped for and later this year than expected. The consensus on Wall Street is that the Fed may only reduce interest rates in one or two increments in the year's second half.

Despite stronger-than-expected inflation data for January and February, Fed Chairman Jerome Powell anticipates cuts to short-term interest rates in the second half of this year. Indications are that the domestic economy remains healthy, but growth is easing. Though employment has proven resilient, new hires and wage increases are slowing.

This week saw the release of the minutes from the latest Federal Open Market Committee (FOMC) meeting held on January 30–31, 2024. Federal Reserve officials were concerned about upside inflation risks, driven by still strong demand. Overall, the FOMC minutes were more hawkish than dovish concerning potential near-term monetary policy decisions.

The initial data releases for January paint a picture of a sluggish start to 2024. While job growth showed resilience, there were concerns about consumer spending and industrial output. Our take is that the growth rate is slowing as the lagged effects of tightening work through the system. However, without a sharp deceleration in the data, the U.S. appears unlikely to enter a recession in 1H 2024.

This week, we recap several macro events, including the Standard & Poor’s 500 (S&P 500) closing above the 5,000 mark, a new milestone for the US market. In addition, the US Bureau of Labor Statistics (BLS) released a strong January jobs report, which showed that 353,000 jobs were created in January, far exceeding the analyst’s forecast of 185,000.

In Q4 2023, U.S. GDP expanded at a +3.3% annual pace, a slowdown from Q3’s +4.9% but the second-strongest growth since Q4 2021. The U.S. Bureau of Economic Analysis (BEA) reported this week that the Personal Consumption Expenditures (PCE) price index was up 0.2% for December vs. the 0.1% decline posted in November.

Since March 2022, the Fed has raised rates by a total of 5.25%. With the tightening cycle nearly 20 months old, concerns are growing about a 2024 economic slowdown. We examine several potential catalysts.

Investors on Wall Street have been anticipating a further pronounced easing of inflation. This week, the release of the December Producer Price Index (PPI) and Consumer Price Index (CPI) reports showed inflation running slightly hotter than expected. However, the long-term trend continues to be favorable.

As we enter 2024, our indicators signal an improving financial environment. The year-end rally may extend into early January, but potential headwinds loom in 2024 Q1. We believe these headwinds stem from the market's optimistic rate-cut forecast and exuberance rather than an economic slowdown.

The stock market extended its recent rally this week, and investor sentiment continues to be positive, backed by the Federal Reserve Chairman Jerome Powell and the Federal Open Market Committee’s (FOMC) decision to hold the federal funds rate steady at 5.25%-5.50%.

The Leading Economic Index (LEI) declined for the 19th consecutive month in October, the longest streak since the 2008 financial crisis. It was also the LEI's lowest reading since May 2020. While the LEI indicates the growth rate is slowing, the Coincident Economic Index (CEI) continues to trend higher and sits at an all-time high.

The stock market continued to trend higher this week following Tuesday’s release of the Consumer Price Index (CPI), which showed progress on the inflation front. The release of the Producer Price Index (PPI) followed, showing that final consumer demand declined. This progress may allow the Federal Reserve to be less restrictive with monetary policy.