The Pulse of Prosperity: Navigating the Currents of a Dovish Economy

Stocks advanced to new record highs last week as eco-nomic data and less-hawkish Fed commentary helped offset worries about the Chinese economy and reinforce soft landing optimism. Profit taking in mega-cap tech shares saw the S&P 500 post a weekly loss of 0.26%, however, which leaves the index up 7.42% YTD.

Stocks rallied at the open Friday as dovish ECB commentary regarding an April or June rate cut helped offset underwhelming earnings from some tech/AI-related stocks. The U.S. jobs report showed strong jobs growth on the headline along with easing wage inflation, a scenario that supports the case for a sooner-than-later rate cut from the Fed.

So, there’s  lots of positive news but the market didn’t rally . The reason news didn’t help stocks rally last week, however, is because there’s nothing new, all this good news is already priced in. Meanwhile, there is virtually nothing bad priced into this market, not even a hint, and that’s why Friday’s jobs re-port, while it fell into the “Just Right” category, also showed an unemployment rate that had risen to 3.9%, the highest level since January 2022! That now joins a growing list of indicators that aren’t signaling weakness, but that are hinting at a loss of momentum:

To be crystal clear, none of those mean the economy is slowing. Nor do they mean a recession is becoming more likely, but they do mean that the economy could lose forward momentum and that is simply not priced into stocks at these levels.

Bottom line, I continue to think that slowing growth is the single biggest vulnerability for this market. Overall the economy remains strong and chances of a meaningful slowdown in the near term are low. However, chances of a slowing of growth that catches investors by surprise are not low, mainly because there is zero allowance for it with the S&P 500 at 5,100.

You may notice on your statements that we have made some recent rebalancing in the portfolios based on these current economic conditions. As always, Thank you for the trust and confidence that you have placed in the Simons Capital Group Team.