Stocks Rally on US Reports and China Stimulus; Bonds Flat
Good morning,
In the final full week of the 3rd quarter, the Dow (+0.6%), NASDAQ (+1.0%), and S&P 500 (+0.6%) each ended the week with modest gains. Meanwhile, taxable bonds were virtually unchanged and tax-free municipal bonds were up about 0.1%. The 10-year Treasury yield gained a mere 0.02% to end the week at 3.75%.
It was a relatively quiet week for US economic data, so two reports took center stage – jobless claims and Personal Consumption Expenditures (PCE). The weekly unemployment claims fell to a 4-month low, and the 4-week moving average also drifted lower. The Fed-favored inflation gauge, PCE, was slightly higher or lower than investor expectations, depending on which gauge was measured. Regardless, the report is showing that inflation continues to move lower, which is good. Combined with a solid labor report, this suggests that the Fed’s attempt at a soft landing is appearing to be successful. A soft landing would be when inflation drops to an acceptable level of 2% without causing a recession or a severe drop in the labor market. However, we suggest postponing the champagne, because there are several other metrics that are pointing to a weakening labor market.
Arguably the most important economic event that occurred last week is also the one that received the least amount of attention. China initiated an enormous economic stimulus package, which caused their stock market to gain an impressive 17% last week. This news propagated its way through all global markets causing the non-US markets to have a very good week, gaining over 3%.
So, what does all this mean? Well, we managed to escape September, which has historically been the worst performing month of the year, as the markets are up about 2% for the month so far. The markets have seemingly priced in all good news, and that the Fed has successfully engineered a soft landing for the economy. Inflation seems to be in check, but it becomes a question of whether or not the labor market continues to remain strong. If it does and inflation doesn’t return, then we can reach for the champagne. I don’t think we are there yet, but we can be pretty happy we have survived a recession as long as we have.
Have a great day and week!
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The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
