Published August 30, 2024
Lots of discussion lately about the impact of a change in Federal Reserve policy on stocks. While markets have unquestionably been enthused about the coming cuts in short-term interest rates, that expected action has presumably already been priced into the market. What happens once the cuts begin? Do stock markets “sell the news”?
The below overview from Delta Research provides some history as well as a brief on recent market moves.
“The 2024 stock market has been all about Nvidia’s 159% appreciation. Nvidia (NVDA) represents nearly 7% of the total S&P 500 market-cap weighted index. Year-to-date through August 28 (just before earnings announcement), the S&P 500 was up roughly 18% versus the equally weighted index (RSP) up 10%. The Dow Jones Industrial Average, which does not own NVDA, was up by about 10% as well.
This week, the equally weighted S&P 500 (RSP) and the Down Jones Industrial Average (DIA) reached all-time highs. It is not just about Nvidia anymore. With investor confidence rising for September rate cuts and a soft landing, the rest of the stock market is beginning to perform.
There are times when the Federal Reserve cuts interest rates and the economy is not in a recession and does not experience a recession for the next twelve months. In these cases, the average return of the S&P 500 in the 12-months following the first rate cut is 17%. In recessionary periods, the average return in the following year is negative 2% with a high degree of variability.
The chart below shows the performance of the S&P 500 one year following the first rate cut in non-recessionary and recessionary periods (red star).
The economy is not currently in a recession. If the economy manages to stay out of a recession for another twelve months, all should be well.
Delta’s two primary recession signals are the inverted yield curve and a negative six-month moving average of the Leading Economic Index (LEI). Both signals have been indicating recession for about the past two years.
We are on the cusp of the treasury yield curve (10-year rate less the 2-year rate) un-inverting. It is not uncommon for the yield curve to invert and then un-invert prior to a recession. The un-inversion is not an all-clear signal. For now, it may just mean that the distortions of the Covid shut down and fiscal and monetary response are dissipating.
It is encouraging that the Dow Jones Industrial Average and the equally weighted S&P 500 reached new all-time highs this week. This suggests it is unlikely a recession will begin in 2024.”
Market Update
Stocks traded flat Monday and Tuesday as investors focused on earnings from market heavyweight Nvidia Wednesday night. The company has been the belle of the ball for the past 18 months as it kicked off a frenzy of investment in AI. Before Nvidia’s report, stocks sold off Wednesday as investors reduced risk should the report disappoint. The company’s earnings showed a continued torrid growth pace, albeit at a slower rate. The company’s stock fell after the earnings report in Thursday’s session. However, the broader market indexes overcame the loss to continue the recent streak of steady, sideways results. Friday brought the Fed’s favored inflation report. The results came in as expected keeping the Fed rate cut plan on track and paving the way for a solid Friday in the markets. Stocks popped higher in the last 30 minutes of Friday’s trade to leave the S&P 500 higher by almost a full +1% on the day. The index closed the month of August higher after being notably lower at the month’s outset.
Friday’s last minute surge upward saved the S&P 500 from a down week leaving the index up +0.28% over the five day span. The Nasdaq 100 (QQQ) slipped -0.78% weighed down by Nvidia’s -7.73% tumble. Smallcap stocks were flat at -0.14% this week as interest rates ticked slightly higher after their recent plunge.
Warm wishes and until next week.