Wall Street staged a powerful rally last week, leaving major indices just a couple of percentage points off the previous highs following a volatile start to the month. Positive economic data played a key role, showing prices remain in check, the labor market is not as bad as feared, and consumer resilience is intact. With just a few trading sessions left before the Federal Reserve’s Jackson Hole Economic Symposium, investors are hoping for a clear signal the Fed Funds rate will be falling through year-end. Given the recent trend, sentiment has shifted back towards a soft-landing narrative. Equities extended the recent win streak to seven days with the index posting its best performance in such a span since October 2022—The S&P 500 Index finished higher by 4.0%, while the Nasdaq Index gained 5.0% and the 30-stock Dow Jones Industrial Average Index advanced 2.8% on the week. The US Aggregate Bond Index traded higher by 0.5%, as rates moved slightly lower for the week.
While investors (and the Federal Reserve) have seemingly switched their focus to the labor market in the broader context of a soft landing, inflation reports are still important for shaping the path of monetary policy. Last week, both producer (PPI) and consumer (CPI) prices came in below expectations. According to the Bureau of Labor Statistics, PPI increased 0.1% in July, reflecting the first decline in services costs this year amid an ongoing moderation. Excluding volatile food and energy inputs, PPI was flat month-over-month and up 2.4% over the past 12 months. Of note, PPI categories that are inputs to the Fed’s preferred inflation measure—the personal consumption expenditures price index—were generally tame.
On Wednesday, the BLS reported that CPI increased 0.2% in July, in line with expectations and a slight pickup from June’s benign reading. Shelter costs were the primary driver, accounting for 90% of the monthly advance. The year-over-year headline figure now shows prices have increased 2.9%, marking the first time this figure has shown a 2-handle since March 2021. Core CPI—which excludes food and energy costs–increased 3.2% in July from a year ago, still the slowest pace since early 2021. The downward trend is intact as the economy slowly shifts into a lower gear, allowing the Fed room to reduce policy rates at their September meeting.
US Consumer Resilience: Retail Sales Climb Most Since Early 2023
Change in value of retail sales vs sales excluding autos and gas (MoM%)
Source: US Census Bureau
Stocks continued the momentum higher following reports showing consumption accelerated in July, driven higher by summer spending. Retail sales increased 1.0% from the prior month while the core measure (excluding autos and gas) pushed higher by 0.4%, highlighting the continued resilience of the US consumer. Ten of 13 categories posted increases in the retail report, helped by a strong bounce back in car sales, electronics, and appliances. E-commerce sales also supported the increase, likely helped by large discount days from retailers such as Amazon, Walmart, and Target.
A separate report from the Commerce Department showed initial unemployment claims fell for the second week in a row, underlining the resilience of the labor market. US consumers have proven to keep spending as long as they keep their jobs, but warning signs have emerged that new spending is increasingly supported by credit card usage. Policymakers will get several more reports on inflation, labor, and consumption—which will be heavily scrutinized given the July selloff—before making their next policy decision.
Earnings Growth: Reported vs Expectations
YoY%
Source: Bloomberg.
While the S&P 500 is still recovering from the recent sell-off, its constituents are on track to report 13.4% earnings growth according to Bloomberg. With nearly 90% of companies reported, earnings season has provided an upbeat perspective on corporate health. Company executives have highlighted cautious optimism that consumers and businesses will keep spending to support future growth, with fewer mentions of recession and layoffs. Recent reports from Walmart, Home Depot, and others in the consumer segment have noted a divergence in spending behavior across income brackets with lower-end consumers increasingly reaching for discounts. Investors will get another update this week when Target, TJX, Lowe’s, and others report Q2 results. On the business front, investments in Artificial Intelligence, the energy transition, and re-shoring should continue to boost capital expenditures. The big outstanding report remaining is Nvidia, which reports on August 28th and can be a market mover. Overall, investors should remain focused on the long-term prospects of the corporate sector as fundamental growth momentum looks durable.
– Written by Eric Schmitz, CFA