The Dow had the longest, daily winning streak record in its sights but ultimately fell just short following Wednesday’s rate announcement by the Fed. While the Dow failed to match the 14-day record set in 1897 – just a year after the index had been created with an initial 12 stocks – the 13-day rally managed to make it the longest daily run since 1987. The wind has been to investors’ backs recently with better-than-expected Q2 earnings, easing inflationary pressures, and a resilient economy supporting the economically sensitive Dow. Earnings have continued to surprise to the upside with 78% of companies having reported managing to beat analyst estimates. This week the focus shifted away from banks and towards Big Tech. AI stocks delivered solidly for investors with Google and Meta both topping estimates and offering upbeat outlooks. A pop in the 10-year treasury yield above the 4.00% level on Thursday, following the Fed’s rate hike the day prior, and a stronger than expected Q2 GDP print prompted investors to take some profits off the table after this month’s stellar run. Despite falling short of the record books, the Dow still managed to finish up 0.66% for its third straight winning week.
Fed Returns from Rate-cation
Elevated core inflation, a strong jobs market, and a resilient consumer prompted the Federal Reserve to resume hiking interest rates to ensure price pressures continue to cool in the months ahead. The central bank increased interest rates by 0.25% to a benchmark range of 5.25%-5.50%, their highest level since 2001. The rate hike was the Fed’s 11th of this interest rate hiking cycle which began in March 2022. In its statement, the central bank sounded upbeat on the economy, upgrading their economic growth forecast from modest to moderate as a series of recent economic reports have shown consumers and businesses continuing to spend. While the rate announcement was entirely expected, investors were highly attuned to Fed Chairman Jerome Powell’s post-FOMC conference comments, looking for clues that Wednesday’s actions might signal the end of this rate hiking cycle. As always, Powell stuck to the script, reiterating that the central bank will remain data dependent and make data-driven decisions on a “meeting-by-meeting” basis. This was to be expected given that core inflation still remains elevated and well above the central bank’s 2.00% target level. The strength in the job market remains a central concern for the Fed, preventing the bank from moving to a less restrictive posture for fear of reigniting inflation. Overall, markets took the news in stride as the Fed offered few details other than what markets had already anticipated.
U.S. Economy Comes in Hotter Than Expected
Slowing inflationary pressures and a strong jobs market helped offset higher borrowing costs to push Q2 GDP up 2.40%. That beat economists’ estimates of 2.00%. Consumer spending, which accounts for two-thirds of the economy, rose 1.60% in the quarter as consumers continued to spend despite high prices and rising borrowing costs. Surprisingly, business investment was also robust during the quarter, rising at a 7.70% annualized rate, up sharply from 0.60% in the first quarter. The increase was driven by higher investment in manufacturing facilities, some of which is supported by the Inflation Reduction Act (IRA) and the CHIPS and Science Act (CHIPS). Government spending also rose during the quarter, up 2.60% which included a 2.50% increase in defense expenditures and 3.60% growth at the state and local levels. The Q2 GDP report shows that while higher rates may be idling certain parts of the economy, overall, it remains resilient and gathering momentum. While we’re still early in the quarter, the Atlanta Fed is currently forecasting Q3 GDP to rise to 3.50%.
Final Thoughts
Records are made to be broken but just not this week as profit takers robbed the Dow of the consecutive daily win title. While a new title may not have been awarded, earnings continue to be better than expected and more and more data is supporting the soft landing narrative, which has translated to solid performance for investors. Despite the Fed having taken rates to a 22-year high, this has done little to dissuade consumer and business spending. Even interest rate sensitive segments, such as housing and business investment, are showing signs of a rebound. PCE, the Fed’s preferred measure of inflation, moderated to 3% in June from 3.8% the previous month. Next week, the July jobs report will be released, and it is likely to show that hiring remains strong while average wage growth continues to cool. If you’re an investor, the data is coming back about as perfect as you could hope for. If you’re the Fed, however, you’re wary. The Cleveland Fed’s CPI tracker is forecasting Core CPI to rise 4.92% yoy while month-to-month is expected to increase 0.40%. The stubbornness in core prices and strength in the labor market will make it harder for the Fed to reach its 2% target. As Powell indicated in his statement on Wednesday, the Fed remains data dependent. As a practical matter, this probably means the bank remains biased toward tightening. Fortunately for investors, however, the FOMC does not meet again until September giving the bulls more time to roam.
The Week Ahead
A hotter than expected ADP report spooked markets in early July, sparking concerns of more aggressive Fed action. Another round of hot jobs reports could do the same as ADP and nonfarm payrolls are set to be released. We’ll also get our latest snapshot on the state of the consumer with both ISM Manufacturing and Services reports on tap.
Staff Spotlight: Probity’s Summer Interns Emily Waller and Keaton Schultz
Probity Advisors, Inc. welcomed two interns this summer: Emily Waller and Keaton Schultz. Our interns have been hard at work gaining hands-on experience and learning what it’s really like inside Probity Advisors. They have embraced the chance to dive into different aspects of our firm, with Emily focusing on the technology side of the business and learning about various programming languages used in quantitative finance and with Keaton learning about Probity’s client-centered approach to financial planning and wealth management. Both Emily and Keaton have spent time with our partners and associates to provide them with the opportunity to see the ins and outs of running a financial planning and portfolio management practice.
About Our Interns
Emily Waller is a rising junior at Southern Methodist University (SMU) where she an accounting major with a minor in data science. When she began her internship, Emily had familiarity with two programming languages, Java and Structured Query Language, more commonly known as Sequel or SQL, and has been learning a third programming language called Python. Emily has used her programming skills to write scripts that extract and organize data across multiple platforms to make it actionable. This has given her a broader understanding of data analytics and system architecture, and she is contemplating making data science a second major as a result of her summer internship experience. Outside of her internship, Emily is a member of SMU’s track and field team where she competes in the 400 meter hurdles, the 4×400 meter relay, the Distance Medley Relay, and the 400 meter race. She graduated with honors from Woodbridge High School in Irvine, CA, where she was a four-time scholar-athlete award recipient and a three-time track and field team captain. Emily has a 3.9 grade point average, and, during track season, she balances her academics with a 20-hour-per week training schedule. She currently serves on the board of one of SMU’s business fraternities, Alpha Kappa Psi.
Keaton Schultz is a rising junior at SMU where he is pursuing a finance degree. He is currently on the SMU Mustang football roster as an offensive line player, a sport he has played since he was just nine years old. Keaton grew up in Spring, TX with siblings who played football at Baylor and at Kansas State and who helped inspire his passion for the sport. He graduated in the top 10% of his senior class from Klein Cain High School in Houston and was one of 25 high school seniors honored by the Touchdown Club of Houston for athletic and academic achievements. Prior to joining Probity, Keaton gained entrepreneurial skills working alongside other pitmasters selling barbecue from a trailer pit and catering events. During his internship with Probity Advisors, he has been learning about financial planning, estate planning, and wealth management. Keaton received the American Athletic Conference All-Academic Award his sophomore year at SMU and currently maintains a 3.8 grade point average on top of his training schedule and his volunteer work. He is actively involved in his church’s community ministry as well as in a non-profit called Forerunner Mentoring that offers mentoring and other support to kids in the Lake Highlands neighborhood of Dallas. Outside of football and his internship, Keaton enjoys fishing, playing golf, and hunting.
If you have an opportunity to stop by our office, we hope you get to meet our wonderful interns. We look forward to cheering them on from the sidelines when they each return their respective sports in the coming school year.