Market Analysis: Positive Economic Events Boosting Confidence in the Coming Months
Introduction:
Last week, the stock market saw light holiday trading volume due to the July 4th holiday. Traditionally, the stock market rallies before major holidays, as consumer and investor sentiment tend to improve.
Federal Reserve Chairman’s Comments:
Fed Chairman Jerome Powell stated last Tuesday that he was pleased with how inflation had stopped rising after its rebound earlier in the year. However, he also mentioned that it was too early to determine whether the Fed could lower interest rates by the end of summer. Powell acknowledged the progress made in the labor market, stating that it had moved towards a better balance.
Analysis: Positive Jobs Report and Unreliable Initial Data:
The monthly jobs report released last Friday appeared positive at first glance, leading to new all-time highs for the S&P 500 and NASDAQ. However, a closer examination of the types of jobs and the significant revisions to the previous two months’ data revealed the unreliability of this initial report. It is crucial to consider these factors when analyzing the health of the labor market.
Market News and Implications:
1. Certainty in Key Interest Rate Cuts:
Wall Street dislikes uncertainty, but fortunately, there is now more certainty regarding key interest rate cuts. Major central banks around the world will follow suit and cut interest rates no later than September 18th. Economic incentives are anticipated in Europe, while tax cuts in the US are expected to improve the “velocity of money,” or the speed at which money circulates.
2. Impact of Strong US Dollar:
The US dollar has remained remarkably strong due to expectations that the US will lead a global economic recovery. While a strong dollar can hinder multinational companies, smaller domestic companies are poised to prosper. The second-quarter earnings forecast for the S&P 500 shows a high expectation of 8.8% annual earnings growth, the highest since Q1 2022.
3. Broadening Stock Market and Presidential Election Year:
The stock market is expected to broaden in the coming months, particularly after the Federal Reserve begins cutting key interest rates. These cuts are seen as a “turbo boost” for the market. Historical patterns suggest that the stock market rallies until the presidential election. If the President-elect can negotiate a ceasefire with Russia immediately following the election, it would be cause for global celebration.
Related Stories:
1. Impact on Russian Energy Exports:
Russia experienced a slump in energy exports during the first week of July due to storms disrupting shipping. Additionally, Ukrainian attacks on Russia’s energy infrastructure may be affecting its exports.
2. Populist Political Shifts in Europe:
The British and French elections showcased the rise of populism. The Labour Party achieved its first major victory since 2005 in Britain, largely due to economic concerns such as citizens struggling to pay their electricity bills. In France, Marine Le Pen’s Rassemblement National (RN) party gained significant support due to safety and security concerns related to migrants.
Conclusion: Positive Changes and Optimism for the Future
Overall, a series of positive economic events and worldwide shifts are expected to boost business, consumer, and investor confidence in the coming months. Inflation is predicted to approach the Fed’s 2% annual target due to weak economic news. The Fed is also likely to follow market rates and cut key interest rates by September 18th. Additionally, the upcoming Democratic National Convention (DNC) in Chicago promises to be intriguing due to internal disagreements over Joe Biden’s mental capabilities.
Amidst the chaos, the United States remains food and energy independent, possesses favorable demographics for organic growth, and maintains a natural optimism. Similar to political shifts in Europe, American populism is driven by a desire for law and order, lower food and energy prices, an end to prolonged wars, and hope for a better future. As we look ahead, fundamentally superior stocks are well-positioned to benefit from these positive developments.
