S&P 500 Rises as Bad News Shifts Investor Focus to 2024-Q3

The S&P 500 (Index: SPX) had a strong week to start the calendar quarter for 2024-Q3. The index climbed nearly two percent from the previous week’s close to end the trading week at 5,567.19, a new record high.

Unfortunately, it was one of those weeks where bad economic news for the U.S. led to the rise of stock prices. The combination of rising unemployment numbers that triggered former Fed economist Claudia Sahm’s recession indicator with signs of slowing real GDP growth.

The latter was signaled by the Atlanta Fed’s GDPNow tool‘s forecast of annualized real GDP growth rate during 2024-Q2, which dropped to +1.5% from the +2.2% growth projected a week earlier. The GDPNow tool’s forecast for real GDP growth rate in 2024-Q2 has more than halved over the past two weeks.

So how does that bad news translate into rising stock prices? The bad news increases the probability the Federal Reserve will act to cut short term interest rates in the U.S. during the now current quarter of 2024-Q3. Investors had been focusing on 2024-Q4 in recent weeks, but shifted their forward-looking focus toward the nearer term quarter of 2024-Q3 during this past week.

That’s important because the CME Group’s FedWatch Tool forecasts the Fed will hold the Federal Funds Rate steady in a target range of 5.25-5.50% until 18 September (2024-Q3), when the tool anticipates the Fed will start a series of 0.25% rate cuts on that date that will take place at 6-to-12 week intervals well into 2025.

The change in how far forward investors are setting their investing time horizon then accounts for the reaction of stock prices to this information. According to the dividend futures-based model, stock prices will rise if the expectations for the rate of change of dividend growth in the quarter to which they fix their forward-looking attention is more positive than what is expected for the quarter in which they had been focusing upon. The latest update to the alternative futures chart shows that change, with the trajectory of the S&P 500 now closely aligned with where the model predicts the index would be when investors are closely focused on 2024-Q3.

For her part, Sahm is calling for the Federal Reserve to start cutting the Federal Funds Rate sooner rather than later:

Sahm, chief economist at New Century Advisors, said the central bank is taking a big risk by not moving now with gradual cuts: By not taking action, the Fed risks the Sahm Rule kicking in and, with it, a recession that potentially could force policymakers to take more drastic action.

“My baseline is not recession,” Sahm said. “But it’s a real risk, and I do not understand why the Fed is pushing that risk. I’m not sure what they’re waiting for.”

“The worst possible outcome at this point is for the Fed to cause an unnecessary recession,” she added.

There was more that happened to shape the future expectations of investors during the week that was. Here’s a quick review of the market moving headlines from the Independence Day holiday-shortened trading week.

Monday, 1 July 2024

• Signs and portents for the U.S. economy:

• Oil prices up 2% to two-month high on summer demand hopes, supply worries
• US manufacturing extends slump; inflation pressures ebbing
• US construction spending unexpectedly falls in May

Fed minions say they’ll lower inflation to +2%, won’t say when:

• Fed’s Williams: Remains confident Fed getting inflation back to 2%

Bigger trouble developing in China:

• China’s June factory activity contracts again, services slows

BOJ minions have worse economy to deal with as Japan’s inflation accelerates:

• Japan downgrades Q1 GDP on construction data corrections

• Japan’s patchy business mood, GDP downgrade cloud BOJ hike timing

Japan’s land prices rise at fastest pace since 2010, tax agency says

ECB minions say they’re in “no hurry” to cut rates again in Eurozone:

• ECB not in a hurry to cut rates further, Lagarde says

Nasdaq, S&P, and Dow climbed higher to kick off the second half of 2024

Tuesday, 2 July 2024

• Signs and portents for the U.S. economy:

• Crude falls as Hurricane Beryl fears fade
• US new vehicles sales growth likely slowed in second quarter
• US overnight funding rate hits highest since January

Fed minions claim inflation is slowing, won’t commit to rate cuts despite “warning signs” for economy:

• Fed’s Powell says US on ‘disinflationary path,’ but more data needed before rate cuts

• Fed’s Powell says disinflationary trend resuming, sees ‘mid-to-low 2s’ inflation in 2025

Fed’s Goolsbee sees warnings signs on real economy

Smaller trouble, bailouts developing in China:

• China property firms jump after big developers show smaller sales drop
• Explainer: What is China’s planned financial stability law and how will it work?

JapanGov minions really worried about risk of Japanese currency collapse:

• Japan’s fin min affirms FX vigilance but avoids intervention warning

ECB minions say their next rate cut will be an easy decision:

• ECB’s next rate cut an easy decision before choices become hard, Wunsch says

Tesla, megacaps drive S&P 500, Nasdaq to higher close

• Tesla jumps 9% as it tracks towards its 2024 high
• The S&P 500’s reliance on a few winning stocks is getting worse

Wednesday, 3 July 2024

• Signs and portents for the U.S. economy:

• Oil prices inch up on large US crude stock draw

Bigger trouble, stimulus developing in China:

• China’s services activity growth hits 8-month low, Caixin PMI shows

Bigger trouble developing in Japan:

• Japan’s service activity slips for first time in 2 years, PMI shows

S&P, Nasdaq close at new record highs as economic data supports the case for rate cuts

Friday, 5 July 2024

• Signs and portents for the U.S. economy:

• US labor market cooling as unemployment rate rises to 4.1%
• Oil up as investors eye strong fuel demand, potential supply disruptions

Fed minions increasingly expected to deliver rate cut as economy slows, say they’ll need more time to reach inflation target:

• Fed rate cut debate in view as U.S. job market cools

• US inflation easing, job market similar to pre-pandemic conditions, Fed report says

Fed’s Williams: still ‘a way to go’ to reach 2% inflation goal

Bigger trouble developing in China:

• China’s central bank has hundreds of billions of yuan of bonds at its disposal to cool long rally
• China, struggling to make use of a boom in energy storage, calls for even more

Bigger trouble developing in Japan:

• Japan household spending falls unexpectedly, clouds BOJ rate path

ECB minions worried about inflation staying higher than target, even as wage inflation slows:

• ECB accounts show worries about stalling disinflation
• ECB continues to see easing wage pressures, chief economist says

Nasdaq, S&P hit fresh highs, bonds rally after June jobs data bolsters Fed rate cut bets

• Megacaps push Nasdaq, S&P 500 to record highs after payrolls data

Image credit: Microsoft Copilot Designer. Prompt: “An editorial cartoon of a Wall Street bull reading a newspaper with the headline ‘BAD NEWS IS GOOD 4 STOCKS 4 NOW’”.