Weekly Economic Update: July 25, 2023

Presented by Nicholas Wealth Management

Rally continues as the market anticipates the July Fed meeting

Last week was a strong one for the market, even though corporate earnings were mixed. (More on this in the next section.) Overall, the Dow Jones Industrial Average (DJIA) closed at new yearly highs on Friday at 35,227.69. The S&P 500 followed suit most of the week, up 18% for the year before sliding off to end the week.

Anticipation about the Federal Reserve’s meeting drove markets.

After briefly pausing its war on inflation last month, the Federal Reserve is resuming the battle by hiking its benchmark interest rate to the highest level in 22 years.

The central bank concluded a two-day policy meeting on Wednesday by announcing that it is raising the federal funds rate by a quarter of a percentage point, lifting the Fed’s target rate to between 5.25% and 5.5%.

The Fed left the door open to further rate hikes this year, with Chair Jerome Powell telling reporters in a news conference that additional tightening is possible unless inflation continues to cool rapidly. The market views the recent decline in the Consumer Price Index (CPI) and weaker consumer spending as reasons for the Fed to stop increases and begin teeing up cuts as we head into the end of the year.

The other side of the coin still sees a strong jobs market and an economy that’s still hanging in there. The initial reading of second-quarter gross domestic product (GDP) will be out the day after the Fed concludes its meeting. Right now, advance estimates are calling for GDP to have grown at 2.4%, topping the first quarter. If that holds true, it will indicate the economy is accelerating — not slowing as we’ve been told.

Core inflation, the measure the Fed focuses on when considering its progress in lowering inflation, is at 4.8%, well above the Fed’s 2% target. It appears the market is racing ahead with disproportionate expectations once more. If the Fed believes the economy and jobs are both still robust enough to handle higher rates, it may try to push core inflation to 2%. It doesn’t seem like the market is anticipating that possibility, and if Powell comes off as hawkish, we could be in for a rocky end to the summer.

A mixed bag of earnings

Earnings season is in full swing. Despite some outsized announcements (Delta and Bank of America) and a few disappointments (Goldman Sachs), markets seem to be rallying. Every earnings season has its surprises, both good and bad, but expectations for the second quarter were particularly glum. Inflation, interest rates, slower consumer spending, a decelerating economy, etc., were all reasons cited for potentially lower earnings. But like everything else, if you could predict everything with certainty, why would we need estimates?

The yield curve inversions that have stuck around for over a year now have been predicting a recession that has yet to materialize. Interest rate hikes were supposed to devastate the jobs market and instead created lots of instability and uncertainty for regional banks. Likewise, earnings were supposed to be horrific, and they just aren’t — and we think it’s good that better-than-expected earnings are defying expectations.

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