The stock market ended the week on a high note, with the Dow Jones Industrial Average hitting a record high, marking its fourth straight month of gains. The Dow rose by 0.6%, while the S&P 500 and Nasdaq Composite saw increases of 1% and 1.1%, respectively. This positive trend was largely driven by slower-than-expected inflation growth, as reflected in the Federal Reserve's preferred measure, the Personal Consumption Expenditures (PCE) price index, which increased at a lower annual rate than anticipated. Additionally, optimism about a potential interest rate cut in September, along with end-of-month rebalancing by investors, contributed to the market's momentum. Despite a rocky start to the month, with the Nasdaq entering correction territory and significant declines in the Dow and S&P 500, the overall performance was robust. Notably, declines in high-priced stocks like Salesforce and UnitedHealth Group were offset by gains in other blue-chip stocks.
Economic Indicators
Labor and economic data will continue to be vital in the upcoming week. This week’s Personal Consumption Expenditures (PCE) report, which showed only slight increases in core inflation, aligns with expectations that the Federal Reserve might cut interest rates soon. This prospect has contributed to positive market sentiment. Additionally, the latest personal income and spending data presented an encouraging economic outlook, indicating that consumer spending remains robust despite ongoing inflationary pressures. This combination of stable inflation and strong consumer activity has reinforced confidence in the economy and supported the current market momentum.
Looking Ahead
Next week, attention will be on the August jobs report and the ISM’s manufacturing survey, set to be released on Tuesday. These reports will offer crucial insights into the economy's resilience and potential direction for Federal Reserve policy. Historically, September is known for stock market volatility, with mixed performances in both election and non-election years, suggesting that investor sentiment might become cautious. Despite this, the current positive momentum presents opportunities for continued gains, especially if the economic data supports a resilient economy. The overall market outlook remains cautiously optimistic, depending on favorable economic data and clearer Federal Reserve policies. While investors should prepare for possible volatility, there are potential opportunities, particularly if the labor market stays strong and inflation continues to ease.
Weekly News
Global Economies Rebound as U.S. Dollar Weakens by Over 2% in August
The U.S. dollar recently weakened by over 2% against major currencies in August, providing significant relief to global economies that had been strained by its previous strength. This decline is largely due to expectations of U.S. Federal Reserve interest rate cuts as the American economy shows signs of slowing. The weaker dollar has led to a recovery in the Japanese yen, reducing the need for intervention, and strengthening the Chinese yuan, though this poses new challenges for China's economy. Emerging market currencies in Asia, like the Philippine peso and Indonesian rupiah, have also gained, while European currencies such as the British pound and euro are benefiting from reduced inflationary pressures. Additionally, Scandinavian currencies like the Swedish and Norwegian crowns have appreciated, with Sweden finding room to cut rates and Norway expected to maintain currency strength due to stable global growth.
Investor Cautions on Stock Rally Amid Concerns of Over-Optimism
As stocks rally from this month's lows, a prominent investor is expressing caution. The Dow Jones Industrial Average hit a record intraday high on Monday, recovering from its August 5th dip, with the index nearing 41,390. The S&P 500 is also close to reaching a new record, just under 1% below its previous high set in July. Optimism has been driven by Federal Reserve Chair Jerome Powell’s dovish comments on potential rate cuts and encouraging economic data, fueling hopes for a soft landing where inflation cools without triggering a recession.
However, Adam Parker, founder of Trivariate Research and former chief equity strategist at Morgan Stanley, is increasingly concerned that stocks are now pricing in an overly optimistic scenario, especially considering potential slowing growth. Parker expects that earnings expectations for late 2024 and 2025 will be revised downward due to weakening consumer spending. He warns that current valuations might not shield investors if a growth scare leads to downward earnings revisions. Consequently, Parker advises reducing exposure to high-flying growth stocks and instead favors high-quality, low-beta growth names with more modest growth expectations. He recommends a cautious portfolio approach, favoring sectors like healthcare and AI semiconductors, and suggests prioritizing consumer staples over consumer discretionary stocks, while avoiding banks and real estate, which, despite appearing cheap, have already seen strong rebounds this summer.
"Magnificent Seven" Tech Stocks Face Investor Pullback, Threatening Bull Market Momentum
The "Magnificent Seven" tech stocks, once market leaders, are facing a significant pullback from major investors, posing a challenge to the ongoing bull market. Goldman Sachs reports that hedge funds and mutual funds have reduced their exposure to information technology stocks to the lowest levels in a decade, with hedge funds selling tech stocks for four consecutive weeks. Bank of America’s data also shows that technology stocks had the largest outflows among all S&P 500 sectors last week. This sell-off has affected major companies like Apple, Amazon, and Alphabet, which remain more than 10% below their 52-week highs. Nvidia, a key player in the AI sector, is under particular scrutiny as it prepares to release its quarterly earnings. The tech pullback raises concerns about the sustainability of the bull market, as these stocks have been critical drivers of market gains.
Stocks Poised for a Strong September: Watch for the "Golden Cross" Chart Pattern
As September approaches, a select group of stocks may be gearing up for a strong performance, driven by a bullish chart pattern known as the "golden cross." This pattern occurs when a stock's 50-day moving average crosses above its 200-day moving average, signaling potential upward momentum. Analysts especially value this pattern when the 200-day moving average is sloping upward, indicating sustained strength.
Stocks rebounded from a sluggish start to August, with all three major indexes ending the month with gains. By late Friday, the S&P 500 had advanced 1.9% for the month, the Dow Jones Industrial Average added 1.5%, and the Nasdaq Composite rose 0.2%. These gains were bolstered by a report on July personal consumption expenditures prices, the Federal Reserve’s preferred inflation measure, which met expectations and reinforced hopes for potential interest rate cuts at the Fed's next meeting in mid-September.
Several stocks are now on the cusp of forming a golden cross, indicating potential bullish momentum in the coming weeks:
Clorox: Shares of the household products maker have surged over 20% in the past month. Clorox’s 200-day moving average is beginning to slope upward, signaling a golden cross after previously flashing a bearish "death cross" in May. Clorox is seen as a defensive play with a strong dividend yield of over 3%, and it recently surpassed Wall Street’s earnings estimates.
Teleflex: This specialty medical device company's stock is up about 19% in the past three months. Its 50-day moving average is close to crossing above the 200-day moving average, indicating a potential golden cross. Teleflex’s strong second-quarter earnings and raised full-year guidance have contributed to its recent momentum.
Crown Castle: Shares of this real estate investment trust (REIT) are signaling an upcoming golden cross. While the stock has pulled back slightly in 2024, it has gained more than 12% in the past three months, positioning it for potential further gains.
Match Group: The online dating platform's stock has soared nearly 24% in the past three months. Match Group exceeded Wall Street’s revenue expectations in the second quarter, boosting its stock performance.
Prologis: This warehouse REIT has seen its stock surge over 18% in the past three months. The combination of robust demand for logistics properties and strong financial performance has driven Prologis's recent gains.
These stocks, poised to form a golden cross, could see continued upward momentum as September unfolds, making them ones to watch for investors looking to capitalize on potential market strength.
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