September 23, 2024

Macroeconomic data turned more positive in the past two weeks, led by a slight improvement in consumer sentiment and stronger than expected August retail sales. The ongoing resilience of the U.S. consumer is certainly encouraging to see.  In addition, housing starts, industrial production, and jobless claims all came in better than consensus expectations as well.  For housing and manufacturing, the two sectors hardest hit by higher interest rates, the recent upticks in activity following a decline in bond yields was noteworthy and may be a sign of things to come.

Buoyed by cooling inflation, the Federal Reserve lowered interest rates for the first time in four years Wednesday, as Fed Chairman Powell spoke of a “recalibration” of policy to reflect the shift in the balance of risks to the employment side of their dual mandate.  The aggressive 50 basis point rate reduction, at a time when the labor market remains solid, the consumer is still spending, and the economy continues to expand at a healthy rate, suggests the odds of a soft economic landing have increased even further.  This seemingly favorable backdrop allowed the US stock market to push upward to new highs on Thursday.  We will be watchful for evidence of renewed “animal spirits” that have the potential of reigniting inflationary pressures.

Recent labor issues at Boeing (the company has offered union workers a 30% pay rise over four years) and a brewing dispute with the International Longshoreman’s Association (85,000 dockworkers that load and unload cargo containers) do not portend that all is well on the labor inflation front.  It goes without saying that market participants will be paying careful attention to these matters and their resolution in the days ahead.

We expect that profit growth convergence between the “Magnificent 7” and the rest of the market, along with the interest rate cuts, should support broader market participation going forward as well as a “catch-up” trade from small caps and early cycle names.  In the very near term, however, we remain braced for additional market volatility heading into a contentious Presidential election with uncertain outcomes for policy and taxes.  The combination of elevated uncertainty along with elevated valuations and investor sentiment present the possibility of market turbulence ahead.

We continue to believe a diversified portfolio of reasonably valued, high-quality durable growth stocks allows ongoing participation in the current bull market while offering superior downside protection amidst any bouts of market volatility that may arise.