MISSION NEWSLETTER
FOR MARKET CLOSE — Friday, September 20th, 2024
THIS WEEK IN THE MARKETS
U.S. MARKET INDEXES OVERVIEW
Stocks up after rate cut
Stocks surged to new highs as investors welcomed the Federal Reserve’s decision to cut interest rates, kicking off what many expect to be a prolonged rate-cutting cycle. Large-cap indexes hit record levels, while smaller-cap indexes, including the Russell 2000, also rallied but remained below their previous peaks. The Fed's announcement, made after its Wednesday policy meeting, revealed a larger-than-expected 50-basis-point rate cut, the first since March 2020. Though initial market reactions were muted, with the S&P 500 dipping slightly, investors began celebrating the news on Thursday, driving the Dow, S&P 500, and Nasdaq Composite to new highs.
DOW & TECH
THE DOW JONES INDUSTRIAL AVERAGE (DJIA) is the oldest continuing U.S. market index with over 100 years of history and is made up of 30 highly reputable “blue-chip” U.S. stocks (e.g. Coca-Cola Co., Microsoft).
The Dow ended the week up 1.62% at 42,063.36 vs the prior week of 41,393.78.
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THE NASDAQ COMPOSITE INDEX tracks most of the stocks listed on the Nasdaq Stock Market - the second-largest stock exchange in the world. Over half of all stocks on the NASDAQ are tech stocks.
The tech-driven Nasdaq ended the week up 1.49%, closing at 17,948.32 vs. the prior week of 17,683.98
SMALL, MEDIUM, & LARGE CAP
THE S&P 500 LARGE-CAP INDEX is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 is regarded as one of the best gauges of prominent American equities' performance, and by extension, that of the stock market overall.
The S&P 500 ended the week up 1.36%, closing at 5702.55 compared to last week’s 5626.02.
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THE S&P 400 MID-CAP INDEX is the benchmark index made up of 400 stocks that broadly represent companies with midrange market capitalization between $3.6 billion and $13.1 billion. It is used by investors as a gauge for market performance and directional trends in U.S. stocks.
The S&P 400 mid-cap ended the week up 2.27%, closing at 3103.32 compared to last week’s 3034.34.
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THE RUSSELL 2000 (RUT) SMALL-CAP INDEX measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The Russell 2000 is managed by London's FTSE Russell Group and is widely regarded as a leading indicator of the U.S. economy because of its focus on smaller companies that focus on the U.S. market.
The Russel 2000 ended the week 2.08%, closing at 2227.89 compared to last week’s 2182.49.
U.S. COMMODITIES / FUTURES OVERVIEW
THE VOLATILIY INDEX for 2024 (VIX)
VIX closed at 16.15 this week, a 2.5% Decrease vs last week’s close of 16.56
THE CAPE Ratio
36.63–Up 3.04% this month.
THIS WEEK’S ECONOMIC NEWS
Strong Economic Data
The week's economic data had a generally positive tone, prompting critics of the Fed’s rate cut to argue that policymakers may have acted too aggressively. Retail sales rose 0.1% in August, surpassing expectations, following a stronger-than-anticipated 1.1% increase in July. Jobless claims also came in lower than expected, with continuing claims reaching a three-month low, signaling strength in consumer spending and employment. Investors were further heartened by a 4.9% rise in building permits in August, the largest increase in a year, though existing home sales unexpectedly fell 2.5%. Fed Chair Powell emphasized that the central bank had limited influence on housing prices and the tight housing supply.
INTERNATIONAL MARKETS
Europe
The pan-European STOXX Europe 600 Index dipped 0.33%, as the rally sparked by the U.S. Federal Reserve’s rate cut lost momentum and concerns about monetary policy grew. While Italy’s FTSE MIB rose 0.58%, France’s CAC 40 gained 0.47%, and Germany’s DAX inched up 0.11%, the UK’s FTSE 100 declined by 0.52%. The Bank of England (BoE) kept its key rate at 5.0%, with most policymakers favoring no change, and provided forward guidance, emphasizing a cautious approach to policy easing. UK inflation remained steady at 2.2% in August, but service prices rose to 5.6%. Meanwhile, hawkish European Central Bank officials advocated for gradual policy easing amid ongoing inflation concerns, with Slovakia's Peter Kazimir suggesting a December review. Eurozone wages grew at 4.5% annually through June, down from 5.2% in the previous quarter.
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Japan
Japan's stock markets rose over the week, with the Nikkei 225 Index up 3.12% and the broader TOPIX Index gaining 2.8%. Midweek, Japanese equities benefited from a weaker yen following the U.S. Federal Reserve's 50-basis-point rate cut, and the yen further depreciated to around JPY 143.8 against the U.S. dollar after the Bank of Japan (BoJ) left rates unchanged on Friday. The 10-year Japanese government bond yield edged up to 0.86%. At its September meeting, the BoJ kept its key interest rate steady at 0.25%, noting moderate inflation expectations and above-potential economic growth. BoJ Governor Kazuo Ueda reiterated the bank’s data-driven approach to future rate hikes, with core inflation rising 2.8% year-on-year in August, up from 2.7% in July.
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China
Chinese equities rose during a holiday-shortened week, with the Shanghai Composite Index gaining 1.21% and the CSI 300 climbing 1.32%, as the U.S. Federal Reserve's rate cut helped offset disappointing economic data. In Hong Kong, the Hang Seng Index surged 5.12%, despite market closures for the Mid-Autumn Festival. August data highlighted slowing momentum in China’s economy, with industrial production rising 4.5%, retail sales up just 2.1%, and fixed asset investment growing 3.4%, all below expectations. Property investment fell 10.2% year-on-year, and urban unemployment ticked up to a six-month high of 5.3%. As these indicators suggest challenges in meeting China's 5% growth target, many economists anticipate further government stimulus measures, with U.S. rate cuts likely giving Beijing more flexibility to ease rates in the coming months.
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International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market.
THIS WEEK’S HIGHLIGHTED STORY
September 18, 2024
What We’re Showing:
Although S&P 500 firms were largely protected from rising rates due to locking in lower rates in 2020 and 2021, many loans are up for renewal in 2025. While S&P 500 returns have typically been positive after rate-cutting cycles, these dynamics may present a unique scenario for corporate America. Sectors that benefited from securing low rates, such as manufacturing, may be most exposed to refinancing risks.
This graphic shows S&P 500 performance after interest rate cuts since 1973, based on data from?PinPoint Macro Analytics.
Key Takeaways
Historically, the S&P 500 returns 4.9% on average one year after the first interest rate cut, seeing positive returns nearly 70% of the time.
In the three months following a rate cut, the market often dips, but typically rebounds by the six-month mark. This aligns with conventional wisdom that lower interest rates stimulate economic activity by reducing borrowing costs for businesses and consumers, which tends to benefit the stock market.
However, S&P 500 performance following?rate cut cycles?can vary significantly. For instance, U.S. equities saw double-digit declines after the first rate cuts in 1973, 1981, 2001, and 2007. On the other hand, the S&P 500 surged 36.5% one year after the 1982 rate cut cycle. In the most recent rate cut cycle, the S&P 500 jumped by 14.5% in the following year.
In this way, interest rate cuts don’t show the whole picture. Instead, positive earnings growth may offer a more reliable indicator of S&P 500 performance in the following year. When earnings growth is positive, the market averages?14% returns?one year after. In contrast, when earnings decline during periods of falling interest rates, the S&P 500 increased by 7%, on average.
ADDITIONAL MARKET HIGHLIGHT
September 16th, 2024 ?
?HOW VIX WORKS
The Volatility Index or VIX is the annualized implied volatility of a hypothetical S&P 500 stock option with 30 days to expiration. It can help investors estimate how much the S&P 500 Index will fluctuate in the next 30 days. While the VIX only measures the volatility of the S&P 500 Index, it has become a benchmark for the U.S. stock market.
The VIX is often referred to as the market’s “fear index or fear gauge”. The performance of the VIX is inversely related to the S&P 500 – when the price of the VIX goes up, the price of the S&P 500 usually goes down.
If the VIX is rising, demand for options is increasing, and therefore, becoming more expensive. If the VIX is falling, there's less demand, and options prices tend to fall. One thing to keep in mind is that current volatility cannot be known ahead of time. That's why it's a good idea to use the VIX in tandem with technical and fundamental analysis.
Indices?are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment. Performance of indices may be more or less volatile than any investment product. The risk of loss in value of a specific investment is not the same as the risk of loss in a broad market index.
HOW CAPE WORKS
The cyclically adjusted price-to-earnings ratio (CAPE) can be used to smooth out the shorter-term earnings swings to get a longer-term assessment of market valuation. An extremely high CAPE ratio means that a company’s stock price is substantially higher than the company’s earnings would indicate and, therefore, overvalued. It is generally expected that the market will eventually correct the company’s stock price by pushing it down to its true value.
In the past, the CAPE ratio has proved its importance in identifying potential bubbles and market crashes. The historical average of the ratio for the S&P 500 Index is between 15-16, while the highest levels of the ratio have exceeded 30. The record-high levels occurred three times in the history of the U.S. financial markets. The first was in 1929 before the Wall Street crash that signaled the start of the Great Depression. The second was in the late 1990s before the Dotcom Crash, and the third came in 2007 before the 2007-2008 Financial Crisis.
THIS DOCUMENT HAS BEEN CREATED BY SHERMAN PORTFOLIOS SOURCES FOR ITEMS DISCUSSED ARE LISTED BELOW.
Sources:
All index and returns data from Norgate Data and Commodity Systems Incorporated and Wall Street Journal
News from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, visualcapitalist.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet, Morningstar/Ibbotson Associates, Corporate Finance Institute.
Commentary from T Rowe Price Global markets weekly update — https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update