Market Recap – Week Ending May 24

Stocks Mixed Last Week; Key Economic Data Coming Friday

Overview: Stocks were mixed across the globe last week as international developed stocks (MSCI EAFE) fell 0.8% and emerging market stocks (MSCI EM) were lower by 1.5%. In the U.S., the S&P 500 index finished higher by 0.1%. Stocks are on track to end May on a strong note, with market optimism for continuing disinflation and strong quarterly earnings buoying consumer confidence. Through last week, the S&P 500 has advanced 5.3% for the month, and the Nasdaq Composite index is higher by about 8%, ending the week at a record high. On the Federal Reserve front, minutes from the latest Fed meeting showed the committee expects inflation to continue to fall over the medium term but stated the process “would likely take longer than previously thought” as the Fed continues to progress toward their 2% inflation target. Recent speeches from the policy committee have supported this view, with  Minneapolis Fed President Neel Kashkari saying Tuesday that he wants to see “many more months” of data pointing to easing inflation before cutting rates. In bonds, yields rose last week as investors adjusted rate-cut expectations, with the 2-Year and 10-Year U.S. Treasury yields finishing higher at 4.95% and 4.47%, respectively. Looking ahead to this holiday-shortened week, key data will come on Friday in the form of the April personal consumption and expenditures report, which includes the Fed’s preferred measure of inflation, the PCE Price Index. The headline PCE and core PCE are expected to be 3.7% and 3.8%, respectively, annualized for April, unchanged from the previous month.

Update on Interest Rates and the Economy (from JP Morgan): Last week, investors received relatively hawkish minutes of the latest FOMC meeting, raising concerns about potential further rate hikes. Additionally, an emerging divergence between the economic and inflation surprise indices prompted fears of stagflation. However, the broader context suggests these concerns are unwarranted. Addressing stagflation first, the economic surprise index has steadily declined over the past year, turning negative in May, and implying weaker-than-expected economic data. Conversely, the inflation surprise index has risen, reflecting hotter-than-anticipated inflation prints. While this might at first suggest stagflation, it is important to note that surprise indices measure against expectations. Despite recent growth data missing expectations, the actual figures remain robust. Notably, the Atlanta Fed's GDPNow model still projects a solid, above-trend 3.5% growth for 2Q24. Additionally, although inflation prints surprised to the upside in 1Q24, the April CPI report showed a welcome cooling in prices. Thus, current fears of stagflation appear exaggerated. Regarding additional rate hikes, the FOMC minutes showed that some members were open to further increases if evolving inflation risks warranted. However, more recent FOMC member speeches and the softer April inflation report suggest a high bar for rate hikes, making them unlikely. Fed Governor Christopher Waller recently clarified that rate cuts are still possible by year-end if data continues to soften over the next three to five months. Therefore, rate cuts appear to be delayed but not canceled for this year. Given this context – no anticipated rate hikes, potential rate cuts by year-end and solid economic and profit growth – markets are unlikely to experience a sustained sell-off.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg, Factset, CNBC

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