The S&P 500 (Index: SPX) had a strong week to start the calendar quarter for 2024-Q3. The index climbed nearly two percent from the previous week's close to end the trading week at 5,567.19, a new record high.
Unfortunately, it was one of those weeks where bad economic news for the U.S. led to the rise of stock prices. The combination of rising unemployment numbers that are close to triggering former Fed economist Claudia Sahm's recession indicator with signs of slowing real GDP growth.
The latter was signaled by the Atlanta Fed's GDPNow tool's forecast of annualized real GDP growth rate during 2024-Q2, which dropped to +1.5% from the +2.2% growth projected a week earlier. The GDPNow tool's forecast for real GDP growth rate in 2024-Q2 has more than halved over the past two weeks.
So how does that bad news translate into rising stock prices? The bad news increases the probability the Federal Reserve will act to cut short term interest rates in the U.S. during the now current quarter of 2024-Q3. Investors had been focusing on 2024-Q4 in recent weeks, but shifted their forward-looking focus toward the nearer term quarter of 2024-Q3 during this past week.
That's important because the CME Group's FedWatch Tool forecasts the Fed will hold the Federal Funds Rate steady in a target range of 5.25-5.50% until 18 September (2024-Q3), when the tool anticipates the Fed will start a series of 0.25% rate cuts on that date that will take place at 6-to-12 week intervals well into 2025.
The change in how far forward investors are setting their investing time horizon then accounts for the reaction of stock prices to this information. According to the dividend futures-based model, stock prices will rise if the expectations for the rate of change of dividend growth in the quarter to which they fix their forward-looking attention is more positive than what is expected for the quarter in which they had been focusing upon. The latest update to the alternative futures chart shows that change, with the trajectory of the S&P 500 now closely aligned with where the model predicts the index would be when investors are closely focused on 2024-Q3.
For her part, Sahm is calling for the Federal Reserve to start cutting the Federal Funds Rate sooner rather than later:
Sahm, chief economist at New Century Advisors, said the central bank is taking a big risk by not moving now with gradual cuts: By not taking action, the Fed risks the Sahm Rule kicking in and, with it, a recession that potentially could force policymakers to take more drastic action.
“My baseline is not recession,” Sahm said. “But it’s a real risk, and I do not understand why the Fed is pushing that risk. I’m not sure what they’re waiting for.”
“The worst possible outcome at this point is for the Fed to cause an unnecessary recession,” she added.
There was more that happened to shape the future expectations of investors during the week that was. Here's a quick review of the market moving headlines from the Independence Day holiday-shortened trading week.
- Monday, 1 July 2024
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- Signs and portents for the U.S. economy:
- Oil prices up 2% to two-month high on summer demand hopes, supply worries
- US manufacturing extends slump; inflation pressures ebbing
- US construction spending unexpectedly falls in May
- Fed minions say they'll lower inflation to +2%, won't say when:
- Bigger trouble developing in China:
- BOJ minions have worse economy to deal with as Japan's inflation accelerates:
- Japan downgrades Q1 GDP on construction data corrections
- Japan's land prices rise at fastest pace since 2010, tax agency says
- ECB minions say they're in "no hurry" to cut rates again in Eurozone:
- Nasdaq, S&P, and Dow climbed higher to kick off the second half of 2024
- Tuesday, 2 July 2024
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- Signs and portents for the U.S. economy:
- Crude falls as Hurricane Beryl fears fade
- US new vehicles sales growth likely slowed in second quarter
- US overnight funding rate hits highest since January
- Fed minions claim inflation is slowing, won't commit to rate cuts despite "warning signs" for economy:
- Fed's Powell says US on 'disinflationary path,' but more data needed before rate cuts
- Fed's Goolsbee sees warnings signs on real economy
- Smaller trouble, bailouts developing in China:
- China property firms jump after big developers show smaller sales drop
- Explainer: What is China's planned financial stability law and how will it work?
- JapanGov minions really worried about risk of Japanese currency collapse:
- ECB minions say their next rate cut will be an easy decision:
- Tesla, megacaps drive S&P 500, Nasdaq to higher close
- Wednesday, 3 July 2024
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- Signs and portents for the U.S. economy:
- Bigger trouble, stimulus developing in China:
- Bigger trouble developing in Japan:
- S&P, Nasdaq close at new record highs as economic data supports the case for rate cuts
- Friday, 5 July 2024
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- Signs and portents for the U.S. economy:
- US labor market cooling as unemployment rate rises to 4.1%
- Oil up as investors eye strong fuel demand, potential supply disruptions
- Fed minions increasingly expected to deliver rate cut as economy slows, say they'll need more time to reach inflation target:
- Fed rate cut debate in view as U.S. job market cools
- Fed's Williams: still 'a way to go' to reach 2% inflation goal
- Bigger trouble developing in China:
- China's central bank has hundreds of billions of yuan of bonds at its disposal to cool long rally
- China, struggling to make use of a boom in energy storage, calls for even more
- Bigger trouble developing in Japan:
- ECB minions worried about inflation staying higher than target, even as wage inflation slows:
- ECB accounts show worries about stalling disinflation
- ECB continues to see easing wage pressures, chief economist says
- Nasdaq, S&P hit fresh highs, bonds rally after June jobs data bolsters Fed rate cut bets
Image credit: Microsoft Copilot Designer. Prompt: "An editorial cartoon of a Wall Street bull reading a newspaper with the headline 'BAD NEWS IS GOOD 4 STOCKS 4 NOW'".