What happened last week
- Powell Pivot: Chair Powell validated the market’s view that a rate cut is coming in September.
- Markets Rally: Investors took comfort in Powell’s words, pushing the S&P 500 to within 1% of its all-time highs.
- Retail Earnings: Strong releases from major retailers further helped sentiment around the consumer.
What we’re watching this week
- NVDA Earnings: The highlight of the week will go a long way to dictating how major U.S. indices trade this week.
- Economic Data: PCE, the Fed’s preferred inflation gauge, jobless claims, and an update on consumer confidence are the main events.
- Geopolitics: The weekend’s news of an Israeli attack on Lebanon may bring geopolitical risk off the back burner for investors.
Horizon’s Investment Management Views
Looking comfortable and relaxed, Chair Powell gave the market what it wanted to hear at his annual address in Jackson Hole: “The time has come for policy to adjust.” A meaningful change from the last two and a half years of Fed communication occurred in the cool Wyoming air – the Fed is no longer looking for any additional slowdown in the labor market. In words as clear as any spoken by a central banker, Powell brought the “Fed put” squarely back into the collective investor consciousness, and markets responded in kind. The S&P 500 rose ~1.5% last week to within 1% of its all-time high. More importantly, breadth continued its clandestine improvement as small-caps rallied over 3% in a tape that favored the more cyclical parts of the market. One caveat: volumes have been particularly light these last few weeks.
Other than Powell’s brief speech on Friday morning, last week’s newsflow was tepid. Earnings from key retailers were a bright spot, helping reassure the market that the consumer is still strong and willing to spend. The credit markets agree that the outlook is positive. High yield spreads are now tighter than at the end of July when the latest growth scare kicked off. Yet other parts of the market, including bond yields and the U.S. dollar, are reflecting some risk premia around the outlook for growth. We are not going with these trends at the moment, but instead are looking for higher participation after Labor Day as a catalyst for yields to drift higher and the dollar stronger.
This week is another light one. Nvidia’s earnings release, important not just for the stock but also for the overall sentiment around the AI theme and the direction of top-heavy U.S. large-cap indices, is the highlight after Wednesday’s close. Friday brings the Fed’s preferred inflation gauge, but given Powell’s speech last week, labor market data are more critical than updates on inflation at this stage. Lastly, tensions in the Middle East continue to simmer, pushing oil higher on Monday morning.
Personal Consumption Expenditures Price Index (PCE) is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services.
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