Stocks Climb to Fresh Record Highs, Interest Rates Steady with the Election in Sight

·???????? After dipping to begin the second quarter, the S&P 500 and Nasdaq have rallied amid solid economic data and generally easing inflation trends

·???????? Forecasters expect one or two rate cuts by the Fed this year, but the November election adds a wrinkle to the macro outlook

·???????? The US jobs market remains firm but has loosened in the past year

Stocks have continued their march to new record highs since we last touched base on the state of the markets. For the year, the S&P 500 is now up 12.1% and the Nasdaq Composite is higher by 14.1%. Not even halfway through 2024, it’s shaping up to be among the strongest back-to-back years going back decades for stocks. The Dow Jones Industrial Average has lagged, up less than 3% on the year.

Year-to-Date Returns: S&P 500 +12%, Dow Weaker

Stocks Rebound Big from an April Retreat

April featured a modest dip as some inflation signals kicked up, but the pullback was short-lived. It didn’t even come close to the common definition of a 10% ‘correction.’ The following month, ‘sell in May and go away’ proved to be awful advice considering that the S&P 500 posted its best May gain in more than a decade, powered higher by big tech stocks, including a monster gain in shares of NVIDIA (NVDA).

1-Month S&P 500 Performance Heat Map: NVDA’s Massive 34% Advance

Tech’s Enduring Shine

It’s been more of the same so far in June. Just last week, NVDA’s market value rose to $3 trillion. If that sounds like a lot, it is. Only Apple (AAPL) and Microsoft (MSFT) are larger in market capitalization. For a brief moment, NVDA inched above AAPL in market cap, and if the semiconductor’s stock continues to ride the AI wave, it could become the biggest publicly traded firm in the world before the first half is over.

NVDA Soars to a $3 Trillion Valuation, Briefly Eclipsing AAPL’s Worth

Interest Rates Ease

In the bond market, conditions are less sanguine. Interest rates have wobbled in the past six months, with the 10-year Treasury note yield reaching a peak of 4.73% in April after beginning 2024 under 4%. At last check, the benchmark rate is near 4.43%. Economists remain fixated on the Fed's next move but will likely have to wait a bit longer for a rate change.

Following healthy macro data lately, odds of the Fed’s first rate cut have been pushed back to Q3 or later. As for corporate bonds, company balance sheets are healthy and cash flow is collectively strong, so there has been some strength in riskier spots of the fixed-income space.

Oil Offers a Consumer Respite

Let’s keep weaving our way through markets as mid-year approaches. Next stop: commodities. The price of oil has leveled off under $80 per barrel. That’s good news as summer travelers fine-tune their vacation plans. The price of a gallon of regular gasoline has fallen to two-month lows, now below $3.50 nationally.

Stations in our area, and throughout much of the South, are posting prices in the $2s with Independence Day in sight. Bigger picture, the broad commodity index that traders track fell in the last two months, hopefully offering some relief on the inflation front.

Gas Prices Retreating Toward $3

Economic Check-Up: A Softening Jobs Market, Why That is a Good Thing

The economy added 272,000 jobs in May, sharply above expectations. Over the past six months, the average employment gain has been solid at 255,000. The labor market is indeed humming along, but it’s a far cry from the tight and toasty times of 2021 and 2022. This throws off a lot of people because it makes sense that more jobs and rising wages are good for workers. The cunning offset is high inflation. And people really hate inflation...

The Unemployment Rate Reaches 4% as Monthly Job Growth Holds Near +250k

In our Weekly Insights blog, we detailed a recent poll that was almost unbelievable. I won’t rehash the details, but Americans remain displeased with financial conditions. Inflation is the culprit. It still stings to walk into the grocery store and see prices so far above where they were four years ago. You might wonder if there’s any hope on the inflation front. Well, I have good news.

Linking consumer prices back to the labor situation, a modestly weaker jobs market is encouraging in the sense that more available workers and easing wage gains should help cool inflation further. The latest numbers reveal that workers’ earnings are growing at about 4% annually while the Consumer Price Index (CPI) is close to 3.5%. The Fed’s preferred inflation gauge, the ‘PCE Price Index,’ is up just 2.7% year-on-year.

The bottom line here is that while inflation is still one or two percentage points to the high side, workers' wage increases are in excess of inflation. As the labor market loosens, inflationary pressures should retreat.

PCE Inflation Holds Near 2.7%, Above the Fed’s 2% Target

For markets, stocks usually like this kind of setup. Easing inflation and a friendly Fed is a recipe ripe for gains, at least that’s what history suggests. And that has played out ever since the last interest rate increase last July. Powerful themes underpin the bull market beyond just the Fed and macro conditions, though.

Ever since the launch of ChatGPT in Q4 2023, AI intrigue has gone through the roof. Corporate investment into AI not only benefits designers and developers of semiconductors, but efficiency gains have also been seen in gauges like worker productivity.

“AI” Is Talked About Nonstop on Corporate Earnings Conference Calls

A revolution is also well underway in another large slice of the US economy. GLP-1 weight-loss drugs have boosted profits for pharma companies like Eli Lilly (LLY) and Novo Nordisk (NVO). It’s hard to know what the lasting impacts of wonder drugs like Ozempic, Wegovy, Mounjaro, and Zepbound will be, but big investors believe they could disrupt the obesity trend in the US. The secondary and tertiary effects of people living longer, healthier lives is a benefit that extends beyond portfolio implications. That’s an upbeat thought, right?

Let’s now go down the dark rabbit hole of what the election could mean for your money. Less than five months away, and with Donald Trump’s court case in the rearview mirror (though his sentencing is yet to take place), the 45th president holds the lead in both the polls and prediction markets.

According to Real Clear Politics, Trump is up by less than a point nationally but commands a significant 3.2% edge in the top battleground states. While it’s unclear if stocks favor one candidate over the other, right now is a particularly bullish point when it comes to presidential elections.

Trump Leads Biden in Battleground States

Market historians and traders like to track how the S&P 500 performs during the so-called election cycle. By aggregating each 4-year term into a single performance view, it might be possible to pick up trends. Analysts at Ned Davis Research pointed out recently that the middle of an election year is just about the best time to be bullish on stocks. Powerful rallies have often taken place now through the first half of the post-election year (which would be mid-2025).

Stocks Love Election Season: Strong Gains from the Election Year Through the Middle of the First Presidential Year

So, as the pundits yell at each other on air and write nasty blog posts about the other side, investors have reason to be excited about what might be in store for markets.

The Biden-Trump redux does present a conundrum for the Fed, though. You see, the Fed is supposed to be independent of what’s happening between Democrats and Republicans. It just so happens that the first rate cut aligns with when voters head to the polls. I think it’s drama and a good CNBC media story more than anything, but it will be interesting to see how Chair Powell and the rest of the Fed handle their decisions in upcoming meetings with the general election in close range.

The Bottom Line

Stocks continue to reach new record highs. The Dow touched 40,000 in May and the Nasdaq, led by AI stocks such as NVIDIA, has been the outperformer since mid-April. The bond market has steadied itself as inflation continues to cool. The trend should empower the Fed to lower interest rates later this year, perhaps around election day, give or take a couple of months.