The financial markets were mixed this past week, with tech sectors performing well while more traditional sectors lagged behind. The S&P 500 and Nasdaq closed higher, but the Dow Jones Industrial Average was down for the week. Tech stocks, particularly those involved in Artificial Intelligence, have been driving the market forward. The Nasdaq is up double digits for the year, while the Dow Jones is only up slightly and down for the quarter.
The current equity market has drawn comparisons to the dot-com market of the late 1990s, with stocks that have AI stories seeing the most success. The markets are not fully embracing the Federal Reserve’s hawkish tone and its projected rate cuts. Lower than expected Consumer and Producer Price Index readings have led to expectations of rate cuts in 2024, with markets pricing in cuts continuing into 2025. Interest rates, which were rising due to Fed hawkishness, declined later in the week.
Inflation news was positive for the financial markets this week, with the CPI and PPI reports both showing lower than expected numbers. Rents rose slightly in the CPI report, but when excluding rents, the core inflation rate would be below the Fed’s target. The PPI report showed negative inflation for May, indicating a potential downward trend in consumer prices in the coming months.
The Federal Reserve held its fed funds rate steady at the recent FOMC meeting, with a median forecast of one rate cut in 2024. However, markets are now pricing in two rate cuts for 2024 and another cut in January 2025. Despite the Fed’s focus on inflation, concerns remain about the overall health of the economy and the labor market.
Commercial Real Estate (CRE) issues, particularly in commercial office buildings, are a growing concern, with vacancy rates on the rise in major metropolitan areas. PIMCO has warned of potential bank failures due to troubled real estate loans. The equity market’s focus on AI stocks and the struggles in the manufacturing sector are reminiscent of the dot-com market, raising concerns about the broader economic outlook.
While the unemployment rate remains low, there are signs of weakness in the labor market, with initial and continuing unemployment claims on the rise. The U6 unemployment rate has increased, indicating a broader view of joblessness. Overall, concerns about potential recession, Fed policy, and economic indicators continue to shape market sentiment.
