By Ben Norris, CFA, Senior Investment Strategist, Vice President
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The S&P 500 (SPX) posted just its third losing week year-to-date but has seen gains in 16 of the last 19 weeks as the index has risen roughly 25% since its low in October. A rise of this magnitude has only occurred 10 times since the Great Depression, underlining just how far and fast we’ve come now that the dominant market narrative is that the U.S. economy will not only avoid a recession but could experience “no landing” as the Federal Reserve (Fed) completes its tightening campaign. This would be an unprecedented achievement for the Fed as each prior rate hiking cycle has ultimately led to a recession, also known as a hard landing as the Fed overtightens financial conditions.
Until recently, economists and investors were hoping that the Fed would engineer its first soft landing – a scenario in which the economy gradually cools, and inflation falls without experiencing a recession. Recent developments in the labor market and stronger-than-expected economic growth are fueling the no landing narrative whereby the economy would continue to grow above long-term trends while also experiencing above target inflation. In other words, no landing means the Fed has unsuccessfully attempted a soft landing but also hasn’t caused a recession. There are both pros and cons in this scenario. The pros are obvious – no recession, no weakening of the labor market, strong equity markets, falling interest rates (maybe), etc. Cons, while potentially less obvious, are just as copious – inflation higher than the Fed’s 2% long-term target, interest rates that might not fall as much or as quickly as investors would like, and the possibility that the Fed is delaying the inevitable.
I believe the final point is what keeps some investors and economists hesitant to trust the latest market rally. The phrase “this time is different” seems to come up each time the market hits a new high, sometimes for good reason. Is this time really different? Can the Fed really hike rates at an historic rate without breaking something? There have been 16 Fed tightening cycles since 1954 and each has led to a recession. Clearly, history is not on the optimist’s side. But optimists argue that the pandemic led to unprecedented levels of stimulus – and they’re not wrong. The growth of money supply experienced from 2020 to 2022 has no historic analog, meaning we (and the Fed) have no clue what the long-term effects of this sort of stimulus might be. I’m generally optimistic, but I do remain concerned about the Fed’s make-it-up as-we-go approach to policy. If a recession does rear its head, could it be worse than a run-of-the-mill recession because we forwent a landing? We’ll have to wait and see, but upcoming economic data could provide more clues to what lies ahead.
Stocks began last week on a sour note as investors prepared for Fed Chairman Jerome Powell’s congressional testimony on Wednesday and Thursday in what was an otherwise quiet Monday. Tuesday saw downward momentum pick up with SPX, the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite (COMP) all falling more than 1%. A sell-off in the Technology sector was the key-culprit in Tuesday’s action following a steep run-up in a few closely watched large-cap companies. Some consolidation was due after the sector had gained more than 9% through the first two months of 2024. Markets regained their footing on Wednesday as Jerome Powell began two days of questioning in front of lawmakers in Washington. Powell indicated that the Fed is still on track to begin cutting interest rates later this year, but warned that policy makers will remain patient and data-dependent in their decision-making. Thursday revealed more strength for Technology stocks, pushing COMP to all-time highs and a one-day gain of 1.5%. Powell concluded his questioning by hinting that the Fed is gaining confidence that inflation is moving sustainably toward 2%, a key pillar in the Fed’s case for cutting rates. Rounding out the week, stocks experienced a large intraday reversal before finishing lower on Friday. Semiconductor stocks, which have seen their prices increase on bullish expectations for artificial intelligence, dragged the market lower as investors took profits. The Philadelphia Semiconductor Index, a broad measure of U.S. chip stocks, fell 4% for the day.
Beneath the headlines last week was a mixture of employment figures that paint a complicated picture of the U.S. labor market. Many of the headline employment numbers showed a resilient labor market but some were artificially inflated by revisions to prior readings. At the same time, the unemployment rate ticked up to 3.9% from 3.7% and notched its highest reading in more than two years. Meanwhile, total hours worked ticked up in February after declining in January and average hourly earnings are still positive compared to last year but at a lower rate than the prior reading. All of this adds up to a slowly weakening labor market – just what the Fed has been working toward as they seek to slow the economy in a measured manner.
This week’s economic calendar is dominated by inflation metrics that will undoubtedly influence the Fed’s thinking ahead of its March 20 policy meeting. Investors will hope that inflation continues to work its way lower, clearing the way for the Fed to cut rates and set stocks on a path higher through the remainder of 2024.
| TIME (ET) | REPORT |
PERIOD |
MEDIAN FORECAST |
PREVIOUS |
| MONDAY, MAR. 11 | ||||
| None Scheduled | ||||
| TUESDAY, MAR. 12 | ||||
| 8:30 AM | Consumer Price Index (CPI) y/y |
Feb. |
3.1% |
3.1% |
| 8:30 AM | Core CPI y/y |
Feb. |
3.7% |
3.9% |
| WEDNESDAY, MAR. 13 | ||||
| None Scheduled | ||||
| THURSDAY, MAR. 14 | ||||
| 8:30 AM | U.S. Retail Sales |
Feb. |
0.7% |
-0.8% |
| 8:30 AM | Producer Price Index (PPI) y/y |
Feb. |
— |
0.9% |
| 8:30 AM | Core PPI y/y |
Feb. |
— |
2.6% |
| 8:30 AM | Initial jobless claims |
Mar. 8 |
216,000 |
217,000 |
| 10:00 AM | Business Inventories |
Jan. |
0.3% |
0.4% |
| FRIDAY, MAR. 15 | ||||
| 8:30 AM | Empire State Manufacturing Survey |
March |
-8 |
-2.4 |
| 8:30 AM | Import Price Index |
Feb. |
0.3% |
0.8% |
| 9:15 AM | Industrial Production |
Feb. |
0.0% |
-0.1% |
| 9:15 AM | Capacity Utilization |
Feb. |
78.4% |
78.5% |
| 10:00 AM | Consumer Sentiment |
March |
77.5% |
76.9% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market