Introduction
The Dow Jones Industrial Average soared to a new record high this past Friday as investors celebrated positive inflation data, sparking renewed confidence in the markets. This marked Wall Street's third consecutive week of gains, bolstered by optimism that the Federal Reserve will continue to cut interest rates.
The 30-stock Dow increased by 137.89 points, or 0.33%, closing at an all-time high of 42,313.00. However, the S&P 500 slipped slightly by 0.13%, ending at 5,738.17, and the Nasdaq Composite fell 0.39% to 18,119.59, with a 2% decline in Nvidia weighing down the tech-heavy index. Despite the mixed day, all three major indices posted weekly gains, signaling underlying market strength.
Last Week Overview
Wall Street ended the week on a positive note, as the Dow and S&P 500 each advanced approximately 0.6%, while the Nasdaq outpaced with nearly a 1% gain. Investors reacted favorably to new inflation data, with the personal consumption expenditures (PCE) price index—a key measure favored by the Federal Reserve—rising just 0.1% in August, in line with expectations. The annual increase was 2.2%, slightly below the forecast of 2.3%, reinforcing hopes for continued monetary easing.
The latest inflation data, combined with strong economic indicators, suggests that the Federal Reserve may continue cutting interest rates. Initial jobless claims fell more than expected, highlighting the resilience of the labor market. Additionally, the final Q2 GDP reading showed the economy grew at a robust 3%, further fueling optimism that the U.S. can continue to expand while taming inflation.
Powell’s Speech: A Dovish Shift?
With inflation seemingly under control, analysts are predicting more rate cuts from the Federal Reserve. Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, commented that these cuts could be a major tailwind for both stock and bond markets. "With inflation contained, the Fed can shift focus to the labor market and continue a rate-cutting stance, which will provide relief for consumers," said Zaccarelli.
However, the Federal Reserve remains cautious about the pace of cuts, with some policymakers voicing concern about the long-term risks of aggressive monetary easing.
Market Reactions: Tech Stocks Lead the Charge
Technology stocks saw mixed performance this week, with Nvidia dropping 2% on Friday. Still, the broader tech sector has benefited significantly from the Fed’s dovish stance, with lower borrowing costs supporting growth-oriented companies. Meanwhile, materials stocks in the S&P 500 surged 3.4% for the week, led by a 15% rally in Freeport-McMoRan, as demand for raw materials remained strong.
Expert Opinions on the Fed’s Path Forward
Amid the optimism, renowned economist Jeremy Siegel weighed in on the Federal Reserve’s future moves. Siegel argued that the Fed should cut rates by 25 basis points at each of the next six Federal Open Market Committee (FOMC) meetings, bringing rates down to 3.5% by mid-2025. He expressed confidence that such a level is appropriate for the current economic environment and dismissed the likelihood of rates dropping below 2.9% unless a recession occurs.
In contrast, some experts like Lazard’s chief market strategist Ronald Temple believe short-term Treasury yields should be higher. He argued that the market might be underpricing the likelihood of future rate cuts, given the Fed's stance and economic resilience.
Sector Highlights: Materials Surge
The materials sector in the S&P 500 had its best week of 2024, rising 3.4%. Freeport-McMoRan, Albemarle, and Celanese were standout performers, each posting double-digit gains. However, Martin Marietta Materials and Vulcan Materials both saw weekly declines of over 1%, limiting the sector’s overall gains.
Outlook for the S&P 500
The S&P 500’s year-to-date performance continues to impress, with historical data suggesting that further gains may be on the horizon. According to data from Carson Group, when the S&P 500 rises in eight of the first nine months of the year, the fourth quarter tends to deliver additional gains, averaging 6.7%. Analysts are cautiously optimistic that the current rally could extend into year-end, supported by continued Fed rate cuts and strong corporate earnings.
Play of the Week: $YUM (Yum! Brands)
Resistance Rejection Play: $YUM has moved into a key rejection zone around the $140 level. This area presents a potential setup for a downside move early in the week.
Primary Entry: Watch the open on Monday for confirmation of a rejection around $140 for potential short positions.
Downside Targets:
- First Target: $135
- Second Target: $134
Entry Point: Monitor Monday's open and look for a rejection around the $140 area before entering short positions.
Exit Points:
- Consider taking profits at the $135 level.
- If momentum continues, target an additional exit at $134.
Stop-Loss: Set a stop-loss just above the $140 level to manage upside risk. Reassess the position if $YUM shows strength and breaks above this level.
Additional Considerations: Pay attention to market conditions, particularly in the restaurant and consumer sectors, which may influence $YUM's movement. Before making any investment decisions, conduct thorough research and consider consulting with a financial advisor. This analysis is based on previous price action, which does not indicate future price action.
China-Focused ETFs Soar
China-focused ETFs were among the best-performing funds last week, with the iShares MSCI China ETF (MCHI) and iShares China Large-Cap ETF (FXI) each rising over 18%. The rally followed the People’s Bank of China’s decision to implement stimulus measures, including a cut to the reserve requirement ratio for banks. Year-to-date, MCHI is up over 24%, while FXI has surged more than 33%.
Conclusion
Last week saw another record close for the Dow and strong gains across multiple sectors, driven by improving inflation data and expectations of further Federal Reserve rate cuts. With Wall Street showing continued resilience, investors are watching closely for further economic indicators, especially the next inflation report and the Fed's actions in the coming months. As we enter the fourth quarter, market sentiment remains cautiously optimistic, though some analysts warn of potential volatility as the year progresses.
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