Hope all is well with you. U.S. stock indexes sustained a modest midweek pullback but finished strongly, with the NASDAQ up more than 2% for the week and the S&P 500 and Dow over 1% higher. The results pushed each index’s record level higher, and it was the sixth positive week out of the past seven for the S&P 500. Robert Redford passed away this week. I have broken down this week’s update using some of his more iconic movies.
All the President’s Men
The President’s subversion of institutional independence is concerning. However, to this point investors don’t seem to care. That is because to investors it is the results that matter. To that end, the average 30-year U.S. fixed-rate mortgage rate fell for the fourth week in a row. The average for the weekly period ended Thursday was 6.26%, down from 6.35% the previous week. When Trump took office in January 2025, the average was as high as 7.04 percent. The drop in mortgage rates came as the U.S. Federal Reserve policymakers approved a quarter-point interest rate cut on an 11-1 vote. The rate cut comes after months of pressure from the administration. It is the first reduction since late 2024. The move was in line with market expectation. Futures markets are implying a 92% probability that the Fed would cut twice by year end. The path for future policy is murky at best. Most members expect to make additional cuts. However, there are big differences of opinion over the timing and extent of these moves. I do expect the concerns about the independence of the Federal Reserve to cause volatility in the future, most likely next spring when it comes time to choose a successor to Chair Powell.
Butch Cassidy and The Sundance Kid
Mega Cap stocks are still the Butch Cassidy of the stock market but the rest of the hole in the wall gang is starting to earn. One key component, the Sundance Kid if you will, is small-cap stocks. The benchmark outperformed its large-cap peer for the week and on Thursday eclipsed a record high set in November 2021. It finished up about 2.2% overall for the week. Even with that strong result, small caps continued to trail large caps on a year-to-date basis. The Federal Reserve’s recent rate cut, with more potentially coming, is a major catalyst for small-cap stocks. Smaller companies often rely more heavily on external financing and are more sensitive to borrowing costs than their larger counterparts. A declining interest rate environment could spur more M&A activity. Given their smaller size and attractive valuations, many small-cap companies could become appealing acquisition targets. The stock market has been dominated by a small number of mega-cap technology stocks for years. As market momentum broadens out to include other sectors and smaller companies, the Russell 2000 is likely to benefit.
Indecent Proposal
U.S. consumers continue to spend money and it is keeping the economy from recession. U.S. retail sales rose 0.6% in August relative to the previous month. The latest monthly sales gain exceeded economists’ consensus forecast and followed a similar increase in July. The longer term question is does the spending expose a deeper insecurity about the economy. It is possible consumers are still front loading their purchase in advance of potential cost increases on the horizon.
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