Last week was shortened by the holiday and the economic data continued to decline. Financial markets responded with bonds and stocks being bid up in expectation that the Fed would be reducing interest rates soon. Interestingly, June was the first month in four years that there was no central bank on the planet that raised rates! Now we will have to see if the data supports the Fed starting to lower rates. Counterintuitively, bad economic news is bullish for the stock and bond markets…
But an interesting thing to watch is the Mag7 stocks producing the vast majority of stock market performance. That’s right, Apple, Microsoft, Google, Amazon, Nvidia, Tesla and Meta are producing most of the gains and when you see the S&P 500 vs the equal weighted S&P 500…
The divergence you see is the difference between an index calculated with the weighting of the Mag7 and one that has equal weightings across the 500 participants. The S&P would be down on the year if it were not for those seven stocks – and economic data is weakening. That is a concern, but just one indicator…
As usual, now everyone is looking to the Fed to see if they will lower interest rates and keep the party going. The Fed Funds Futures are predicting a 60% chance that the Fed will lower the overnight interest rate by .25% to the 5% to 5.25% range. There is quite a bit of time between now and then so inflation indications will be on everyone’s radar. One of the concerns that we have looking forward with inflation in mind is the recent strength in crude oil – so that will stay on our radar. Massive government spending is causing a “stickiness” to inflation and even Fed Chair Powell is suggesting inflation won’t get back down to 2% any time soon. Maybe the Fed will lower .25%, but don’t hold your breath for drastically lower rates.
The financial markets are obviously pricing in lower interest rates in the near future – at least to a small degree. The short interest in most of the stock market has declined and the VIX – which is a volatility indicator – shows that most people are not concerned about the stock market selling off. That may be a short-term concern. Just a few companies representing the entire growth in the stock market is a medium to long-term concern. Government job openings are more than 100% of growth in the labor market. That’s right – private sector employment is declining. That may be another temporary situation, but if it continues it is yet another long-term concern to pay attention to! Stay tuned…
Regards and good investing,
Greyson Geiler