Stocks traded higher early this week before giving back some gains on Thursday. It's been an impressive recovery in the equity market after the early-August volatility, with the S&P 500 less than -2% below its July 16th all-time high. This week’s gains were small with limited return dispersion, but there was a minor rotation underneath the surface.

This week, the S&P 500 continued to trade higher following the recent market volatility. The index has reclaimed its 50-day moving average and improved its technicals from the early August low. This week, the market returned to its 1H 2024 regime.

This week, the market experienced significant deleveraging as it saw a decline in risk appetite: defensive sectors and gold outperformed. Stock and bond volatility spiked, but the credit market showed little sign of stress. We expect residual volatility in the near term as the market seeks a new equilibrium.

This week, the Bureau of Economic Analysis (BEA) reported a 0.1% month-to-month increase in the personal consumption expenditures (PCE) price index, matching economists’ outlook for a 0.1% expansion; the headline PCE index was unchanged in May. On a yearly basis, the index rose 2.5%, on par with estimates and below the prior reading of 2.6%.

This week’s economic data from the Bureau of Economic Analysis (BEA) supports Wall Street’s anticipation of a “soft landing” for the U.S. economy, specifically a continued modest expansion and an avoidance of a recession. 

This week's performance was similar to last week. The Nasdaq 100, Momentum, Growth, and Technology sector underperformed, while the Russell 2000, Value, and Equal Weight factors outperformed. We attribute the ongoing factor rotation to the slow momentum trade as interest rate cuts come into view.

This week, the S&P 500 traded above 5,600 for the first time this week. However, the Thursday market rotation after the June CPI release shaped returns. Headline CPI fell by -0.1% in June, the slowest since May 2020. Core CPI rose by +0.1%, the slowest since August 2021.

This week, stocks and bonds traded range-bound. The large size factor continued to outperform Small, and there was limited factor and sector dispersion. Treasury yields were volatile but ultimately ended the week unchanged, with bonds remaining overbought territory after the recent drop in yields. Notably, WTI crude traded back above $80 per barrel.

This week’s performance was top-heavy as the size factor continues to shape equity returns. The Magnificent 7 propelled the S&P 500 and Nasdaq 100 to new all-time highs, with Technology as the top performer. This week’s note discusses this year’s top-heavy return profile and how it’s distorting headline returns.

This week, the Bureau of Labor Statistics released May’s employment data, which showed 272,000 jobs were added to the economy, exceeding the expected increase of 190,000 and the revised prior-month tally of 165,000. Conversely, the unemployment rate ticked up to 4.0%, versus economists’ outlook of 3.9% and the April level, which was also 3.9%

This week's data suggests that the Fed may be more hesitant to reduce interest rates over the near term due to robust manufacturing sales forecasts. If the US economy continues to expand without accelerating wage growth and inflation, stocks likely will gain further ground, though incrementally. The Federal Reserve's rate cuts would provide support, and we expect rates to be lower by the end of the year.

This week, stock market indexes cemented a full recovery from April’s pullback, reaching respective records. Fed Chairman Jerome Powell’s comments that short-term interest rates, currently in the range of 5.25%-5.50%, were more likely to fall than rise in the second half of this year most visibly supported share prices. A cooler inflation report, by way of the Consumer Price Index, for April backed this rate policy likelihood.