It was another strong week for the stock market, with the S&P 500 hitting more all-time highs. The leading narrative behind the positive returns is the growing belief in a "soft landing," where the economy experiences a cyclical slowdown without tipping into recession. This outcome is a key goal of the Federal Reserve, especially after raising short-term interest rates to curb inflation. So far, the data supports this outlook.
Last week’s economic data was indeed encouraging. Both second-quarter GDP and projections for the third quarter suggest not only an absence of recession but also a lack of significant slowdown. Additionally, the Fed’s preferred inflation measure, core personal consumption expenditures (PCE), excluding food and energy, came in as expected at 2.7% year-over-year.
On the global front, the biggest news was China’s announcement of a massive stimulus package, including rate cuts, increased lending facilities, and support for its equity markets. This is expected to bolster not just China’s economy but also global markets. China's overall stock market saw its best weekly return since 2008, and its year-to-date performance has now surpassed both the S&P 500 and the NASDAQ.
Looking ahead, this week’s critical non-farm payrolls report on Friday is expected to show just under 150,000 new jobs and an unemployment rate of 4.2%. This week also marks quarter-end, and despite historic events and market volatility, it has been another good quarter for investors. Three quick observations to note. First, the average stock has been outperforming the overall market for a few months now, which over the long term tends to be the norm, but has not been the case over the last decade. Second, non-U.S. stocks have also outperformed of late, raising the question of whether global investing might finally see a long-anticipated resurgence. A weaker U.S. dollar, which has been the case for over five months now, would be a tailwind for non-US stocks. Third, retail investors are now more bullish on fixed income than they have been in decades, which to contrarian investors would suggest that the bond market is now vulnerable to a reversal of recent strong gains.
Finally, as we enter October during an election year, there is the potential for an “October Surprise,” where unexpected events shift the dynamics of the election. If such an event occurs, it could make October a turbulent month for markets. One possible surprise could be the looming East Coast port strike, which, if it happens, would be its first since 1977.
Add it all up...
Stay invested. Stay diversified. Stay disciplined.
If you have any questions or comments, please let us know at strategists@brinkercapital.com or at rusty@orion.com. Thank you for your time and trust. See you next week!