Why The Next Two Weeks Are So Important
It’s not an exaggeration to say that the next two weeks could likely determine if stocks hold (and potentially extend) the YTD gains or if volatility re-emerges and we have a tumultuous end to what has been, so far, a good year in the markets. I say that not to be hyperbolic, but instead because it’s true, as each of the major supports of this rally will be tested over the next two weeks and if currently positive market expectations are undermined, then with the S&P 500 still trading above 21X earnings, an air pocket of a 5%-10% pullback will likely occur (and possibly worse).
Test One: Soft Landing. We’ve seen quite a switch in the outlook for the economy over the past two months. In July, a soft landing was all but guaranteed. However, hard landing fears rose (and stocks dropped) in August and September as labor market data disappointed. Then, over the past month, data has rebounded and at this point, a “no landing” possibility is openly discussed. Over the next two weeks we will get important economic updates that will either 1) Validate the soft landing thesis (positive for stocks) or 2) Challenge it (one way or the other, via a soft landing or hard landing).
Specific data points to watch include the jobs report, ISM Manufacturing PMI and Services PMI (the first two out this Friday, the Services PMI out next week). For markets to pass this test, economic data needs to remain Goldilocks (so not too hot and imply no landing and less rate cuts, nor too soft and hint at a recession).
Test Two: Earnings. Earnings have been, in many ways, the “unsung hero” of this rally as earnings growth has remained remarkably consistent throughout 2024, allowing the S&P 500 the fundamental justification to rally to current levels. But we get the final earnings updates for 2024 this week, including AMD/GOOGL and V on Tuesday, META/MSFT on Wednesday and AAPL/AMZN and INTC on Thursday. For the market to pass this test, we need to see guidance from these companies remain upbeat and above expectations, underscoring that earnings growth is solid.
Test Three: Aggressive Fed Rate Cuts. Fed expectations have also shifted wildly in the past few months, as in June just one rate cut was expected, while by August multiple rate cuts were forecast by year-end. The Fed validated those dovish expectations via the 50-bps cut in September and markets proceeded to price in another 75 bps of cuts between then and December. Since then, because of good data and stickier inflation, rate cut expectations have declined to just two 25 bps in November and December and that’s less certain than before. For the market to pass this test, Fed rate cut expectations need to stay at two 25 bps cuts in November and December (and not decline below 50 bps of additional easing).
Test Four: Political Calm. Markets have been amazingly resilient in the face of geopolitical upheaval (two ongoing major wars) and throughout this election season, but that will be tested on November 5th. Depending on when the outcome is known (no verdict on or shortly after election night would be a worst-case for markets) and the make-up of the government postelection, markets may be forced to face (and account for) looming fiscal challenges, budget battles, elevated trade tensions or similar issues.
Meanwhile, the transition of power in the U.S. may embolden global adversaries and potentially intensify global conflicts. For the market to pass this test, we need to have political clarity out of the election and have the geopolitical situations (wars) not spread or intensify.
The bottom line here is the market has been incredibly resilient this year, but that resilience will be tested in a big way over the next two weeks. We will be here, committed to helping you cut through the noise and stay focused on the core drivers of this market, which remain growth, Fed rate cuts, and earnings. Ultimately, they will determine whether this market extends this rally into year-end or if we see an uptick in volatility that makes the final two months of 2024 more difficult than the first four.
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc.