Smart money used to say, “Sell in May and go away” – meaning that summer was no time to be invested in stocks. Ha! Not this year! On Friday, after Federal Reserve Chairman Jerome Powell spoke from Jackson Hole, markets rallied and the Dow Jones Industrial Average and the Standard & Poor’s 500 both closed at record highs.
So, what did Powell say? After all, we seem to have sticky inflation and a weakening job market. The first would indicate interest-rate hikes are needed, while the second points to interest-rate cuts. What to do, what to do?
Powell said, “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” Huh? To me that reads like we’ll wait and see, but markets took it for a prediction of a rate cut at the Fed’s mid-September meeting. Stocks rose. We still have some August data releases to look forward to before the Fed decision, including especially the August jobs report, which will be issued on Friday, September 5th.
But Powell went further and said that “downside risks to employment are rising,” while “a reasonable base case is that the effects [of tariffs on inflation] will be relatively short-lived.” Okay, now he’s saying that employment problems might be more important than intractable inflation. That points to rate cuts. After all, the Fed can decide any time it wants to raise its inflation target to 3% (currently 2%) and declare inflation conquered.
Powell keeps his cards close to his chest, even though the Fed Open Market Committee (FOMC) releases minutes of its meetings after the fact. But we know that he is under political pressure to cut rates. The next Fed meeting is September 16-17, with a rate decision expected on the 17th.
So – stocks at highs, and bonds rising modestly (which pushes rates down) on expectations of lower interest rates. But while the Fed sets interest rates that its most-favored-banks pay to borrow money (from the Fed) – also known as the Fed-funds rate, the marketplace sets most interest rates, and the Fed can’t control it all.
The yields on Treasury Notes are down slightly, and so are 30-year mortgage rates, which may help ease the tightness in the housing market. It hasn’t happened yet, though. In July, 15.3% of homes that went under contract saw those contracts cancelled. The most likely culprit is that potential buyers were unable to obtain affordable financing, or possibly any financing at all.
We’ve seen from the recent jobs numbers (and past revised jobs numbers) that hiring is stalled in the U.S. But employers aren’t firing workers either. The percentage of layoffs as a share of total employment was near a record low in June. Workers are hanging on to their jobs, in a trend called “job hugging”. It makes sense not to quit your current job when nobody is hiring. “The official U.S. labor force, which measures the number of working-age Americans actively working or looking for work, is shrinking at a rate normally seen during the depths of economic crises. In fact, the pool of available workers has now stalled for three straight months, the first such streak since 2011.” (Business Insider)
Weakness in tech stocks continued late last week, as money flowed into other sectors, which are arguably less over-valued. Broad-based market rallies are widely considered to be more durable than narrow ones. And the fact that the Dow hit a new record on Friday indicates that value stocks, which tend to be slower-moving but dividend-paying are currently outpacing the high-tech growth stocks that largely comprise the Nasdaq Composite Index.
Remember when Saudi Aramco, the sovereign oil company of Saudi Arabia, sold shares in an initial public offering (IPO) in 2019? Investors around the world were warned that if they didn’t participate, they would be sorry later. Oops. Over the past five plus years, the stock has underperformed other energy stocks and trading volume is now falling. Saudi Aramco is having to borrow money to pay its dividend. So, you didn’t miss much.
The most expensive daycare in the country is in Arlington County, Virginia, where the median cost of sending a child to daycare for five years is $146,741. Yikes. And meanwhile, daycares are closing because they can’t make ends meet and find workers.
For the week ending on August 22nd, the S&P closed at 6,466, the Dow at 45,631, and the Nasdaq at 21,496. The yield on the ten-year Treasury Note finished at 4.260%. U.S. crude oil cost $64.07 per barrel, N.Y. gold cost $3,371.52 per ounce, and one Euro was worth $1.17.
Elizabeth E. Cook
Partner, Diastole Wealth Management
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) Barron’s, Axios, The Wall Street Journal, USA Today, Morning Brew, Bloomberg, CNN, The Economist, Business Insider, CNBC, Reuters, The New York Times, The Washington Post, and The Associated Press. If you have questions, please call Diastole at 203.458.5220, or reply to this email to reach me, Liz Cook.
Since you probably didn’t attend as much art school as I did, you will be forgiven if you don’t know that parchment is made from treated animal skins. Vellum, particularly, is made from calfskin. But even I didn’t see this macabre story coming: it turns out that if you lose a loved one who carries a unique tattoo, an Ohio company called Save My Ink Forever will remove the tattoo, treat the skin until it resembles parchment, and frame it for your living room wall. Thank you Popular Science for haunting my dreams forever.