In The Know – August 16, 2024

At Financial Issues, we help you stay in the know about the financial issues of the day. We keep you abreast of what’s happening in the economy, in the markets, and help you understand how that impacts your personal financial matters and our biblically responsible investment strategy. Here’s a summary of the economic news that occurred during the week ending August 16, 2024.

The markets have rebounded nicely over the past week, as all the economic data this week has come in. I would describe it as quite decent. The S&P 500 is up over 4% over the last week, but it’s still 2% below its mid-July all-time high and up over 16% year-to-date.

The Dow tells a similar story, up 3% over the last week but still almost 1% below its mid-July all-time high, and it’s up about 7.5% year-to-date. The Nasdaq has been the big winner over the past week, likely because it was the biggest loser during the recent market drop.

The Nasdaq is up over 5% this week but remains 5.5% below its early-July all-time high, and it’s up 19% year-to-date. Pre-markets are indicating a slight negative opening today, suggesting that the markets may be taking a breather after a strong week.

Inflation data was released this week, with the Producer Price Index (PPI) and Consumer Price Index (CPI) reported on Tuesday and Wednesday, respectively. The officially reported pace of inflation continues to decline, but at a minuscule rate. Translation: Prices are not rising as fast as they were two summers ago, but they are nowhere near going down. Declining prices would indicate deflation, not disinflation. This news seems to keep the Fed on track for a rate cut in September.

Initially, after the market downturn, there was talk of the Fed potentially making an emergency rate cut and definitely implementing a 50 basis point cut in September. Now, the odds are higher for a 25 basis point cut in September, but we still have the August jobs report considering before the next Fed decision. The market is currently pricing in a 200 basis point rate cut over the next year. However, the Fed’s dot plot only indicates 100 to 150 basis points of cuts by the end of 2025. Once again, the market is expecting more than what the Fed has indicated it is likely to do, leaving a lot of room for disappointment. The market is expecting a 200 basis point cut, while the Fed is signaling only 100 to 150. This is another reason we are advising our partners to hold more cash right now. If the Fed fails to meet the market’s expectations, it could lead to a negative market reaction.

Headline and core CPI in July each rose 0.2% month-over-month, as expected. The official annual rate of inflation is now 2.9% for PPI and 3.2% for CPI, both 0.1% lower than last month. The biggest disappointment in these numbers was auto insurance, which remains a significant issue. I’m sure many of you are quite aware of this. Auto insurance prices rose another 1.2% month-over-month, which may not seem like much until you consider the year-over-year figure.

Auto insurance rates have increased 19% year-over-year, which has a significant impact on consumers. Officially, prices as measured by CPI have risen 20% since Biden took office. Does it feel like a 20% increase to you? Probably not.

Here’s why: Rents and home prices aren’t included in the CPI measure, nor does it measure all the things the average American spends money on every week and month. It also doesn’t account for the various ways we are being nickel-and-dimed with junk fees.

Service providers have found creative ways to increase their total ticket cost without officially raising prices. For example, non-alcoholic beverages at restaurants, like fountain drinks, can cost around $4, which seems ridiculous, especially when you have to get the drink yourself. Additionally, everything is now being charged à la carte, from picking your seat on a flight to adding luggage, carry-ons, cheese, bacon, and other extras to your burger. While the price of a burger hasn’t risen as much, adding all those extras significantly increases the overall cost.

An economist in an article I read this week compared the Fed’s behavior to a child covering their eyes and thinking they’ve disappeared. The Fed prefers the PCE measure of inflation over CPI, with PCE typically about 100 basis points below CPI. By focusing on PCE, the Fed believes they are closer to their inflation target. Retail sales on Thursday were another key focus this week. Inflation, retail sales, Walmart earnings—all of these were closely watched. Retail sales came in much stronger than anticipated, far exceeding the street’s expectations and even my own.

Although my concerns about the economic data this week didn’t fully materialize, they remain high on my radar. I still believe we may begin to see more deterioration in these indicators. Whether this leads to a recession remains to be seen, but the odds are increasing. However, retail sales were stronger than expected, and Walmart did not disappoint.

Walmart is clearly emerging as a leader in the retail space, performing well overall. Now, Walmart is not biblically responsible, so don’t take this as a buy recommendation. Nevertheless, it’s interesting to see what Walmart’s performance says about consumer behavior. Walmart has been gaining more market share, with groceries becoming their biggest revenue generator, offering valuable insights into consumer trends. Walmart reports that lower-income consumers are definitely struggling, and even higher-income consumers are beginning to make different choices, downgrading their brand selections, and spending more on needs versus wants.

Looking ahead to the coming week, there isn’t much that will be earth-shattering. However, we do get the minutes from the most recent FOMC meeting, which will likely be accompanied by much Fed commentary. I didn’t check the calendar, but typically, the Fed meeting occurs, they announce whether they’re increasing or decreasing rates, and then hold a press conference. However, the full details of what was discussed in the meeting aren’t released until the minutes are published.

If everything in the minutes was well-telegraphed and clearly communicated in Jay Powell’s statement, the press release, and the Fed commentary since then, the market probably won’t react much. But if there’s something unexpected, the market could respond significantly.

We also have durable goods data coming next week, another economic indicator that will provide insight into how quickly economic conditions are deteriorating in the United States.

Yesterday, the markets ended on a very strong note. The Dow closed up 1.39%, the S&P 500 up 1.6%, and the Nasdaq up 2.34%. Markets are indicating a negative open this morning, likely just taking a breather.

I don’t expect anything earth-shattering to come out today. Rest assured, we’ll keep you informed.

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