Last week was characterized by light holiday trading volume due to the July 4th holiday. Traditionally, the stock market rallies going into major holidays, as consumer and investor sentiment tend to improve. Last Tuesday, Fed Chairman Jerome Powell said he was pleased with how inflation had stopped rising after its rebound at the start of the year, but he also said it was too soon to say whether the Fed might be able to lower interest rates by the end of summer. At a conference with other central bankers in Portugal, Powell said, “We’ve made a lot of progress” as the labor market has “moved toward a better balance.” Speaking of the labor market, the monthly jobs report last Friday seemed positive on the surface, lifting the S&P 500 and NASDAQ to new all-time highs on holiday-shortened trading, but a closer look at the types of jobs and the huge revisions to the last two months’ data show how unreliable this initial report can be.
Here are the most important market news items and what this news means:
- Wall Street hates uncertainty and fortunately all of a sudden, everything is now much more certain. The Fed will be following other major central banks and cutting key interest rates no later than September 18th. Economic incentives are expected to be passed in Europe and in the U.S., tax cuts are expected to improve the “velocity of money,” which is how fast money is changing hands.
- The U.S. dollar has been amazingly strong since the U.S. is expected to lead a worldwide economic recovery. A strong U.S. dollar can hinder multi-international companies like the big stocks that dominate the S&P 500, however, smaller domestic companies are poised to prosper! The expectations for the second quarter earnings remain very high with 8.8% forecasted annual earnings growth for the S&P 500. I should add that these are the highest forecasted earnings growth since the first quarter of 2022.
- Although the stock market narrowed in the second quarter, it is expected to broaden out in the upcoming months, especially after the Fed commences cutting key interest rates. These Fed cuts are essentially the “turbo boost” that the stock market has been waiting for. The historical pattern in a Presidential election year is that the stock market rallies right up to the election. Immediately after the election, if the President-elect can get Russia to agree to a ceasefire, the world will celebrate.
- Russia’s energy exports in the first week of July slumped by almost 1 million barrels per day to 2.67 million per day. This is the lowest weekly crude oil shipments since January when storms disrupted shipping. The four-week moving average of Russian crude oil shipments also dropped by 215,000 barrels to 3.27 million per day, which is the lowest level in 20 weeks. It remains unknown whether the Ukrainian attacks on Russia’s energy infrastructure are impacting its exports.
- There are massive political changes underway. The British and French elections demonstrated that populism is on the rise. Britain had its first major victory for the Labour Party since 2005. When it comes to voters, economic news overshadows everything. The simple fact that many British citizens could not pay their electricity bills is why the Labour Party had such a decisive victory. In France, the Marine Le Pen’s Rassemblement National (RN) party surged in almost every city due to safety and security concerns, largely from migrants who have not been assimilated into French society and have been committing petty crimes.
Overall, a series of positive economic and worldwide events are expected to boost business, consumer and investor confidence in the upcoming months. First, due to weak economic news, inflation is expected to finally approach the Fed’s 2% annual target. Second, the Fed will follow market rates and other central banks and cut key interest rates no later than September 18th. Third, the Democratic National Convention (DNC) in Chicago this month should be fascinating due to all the infighting over Joe Biden’s mental shortcomings.
Despite this chaos, America remains food and energy independent, has better demographics for organic growth, and is naturally optimistic. The big populist shifts in Europe have similar roots to the American political shifts since it is fueled by people who want law and order, lower food and energy prices, an end to seemingly endless wars, as well as hope for a better future. I for one am excited about the future and am excited to see positive changes unfold in the upcoming months and years. Naturally, fundamentally superior stocks are poised to benefit from these positive developments.
