Market Momentum: Your Weekly Financial Forecast & Market Prep

Weekly Wrap-Up

Federal Reserve Easing Cycle

Recently, the Federal Reserve initiated its anticipated easing cycle with an unexpectedly large rate cut of 50 basis points (bps), surprising market participants who had anticipated a more typical 25 bps reduction. This bold move signaled the beginning of a new policy direction by the Fed, even as economic indicators, like the August retail sales report, remained strong. Historically, such outsized cuts have been used when the economy is on the brink of a downturn, characterized by a sharp decline in retail sales momentum, as seen in January 2001 and September 2007. However, in this instance, the strong economic backdrop did not fully align with the Fed's aggressive action.

Fed Chair Jerome Powell described the rate cut as a "recalibration" of monetary policy rather than an indication of future cuts, explaining that the aim was to ensure the economy's continued strength rather than to address any immediate weakness. Despite initial concerns from investors that this move might suggest hidden vulnerabilities in the economy, Powell's reassurances seemed to quell those fears. While future rate cuts are expected to be more gradual, as indicated by the Fed's dot plot, investors now face a shorter window to diversify out of cash, prompting a shift in market sentiment.

Stock Market Performance

The U.S. stock market has been on an upward trajectory, with last week marking the sixth weekly gain in the past seven weeks. Since early August, stocks have surged by 11%, demonstrating resilience despite the looming uncertainties surrounding the upcoming U.S. presidential election. This impressive performance underscores the market's focus on Federal Reserve policy rather than political concerns, which have not yet triggered significant volatility.

As the U.S. approaches election day, markets are expected to experience volatility, but this is likely to be short-lived. Historically, market turbulence surrounding elections is driven by the repricing of potential new policy proposals rather than a fundamental reaction to the election outcome. Market volatility has typically subsided once a clearer policy direction emerges, regardless of which political party assumes power. For instance, after the 2000 election, marked by the "hanging chad" controversy, volatility persisted until the Supreme Court resolved the outcome in mid-December. However, following the resolution, volatility, as measured by the Cboe Volatility Index (VIX), declined substantially.

Post-Election Market Trends

Looking at historical data, the U.S. stock market has generally performed well in the aftermath of presidential elections. In the month leading up to elections, the stock market has been positive in just over half of the years. However, the period from election day through year-end has been overwhelmingly positive, with only three instances of declines in the past 80 years. Notably, the largest post-election gains were recorded in 2020, 1952, 1960, and 1980, with strong performance seen under both Republican and Democratic presidencies. This reflects the idea that broader economic conditions, rather than political outcomes, are the primary drivers of long-term market performance.

In the week following an election, stock market performance has been mixed, with an average decline of 1%. However, over the longer term, the market has rebounded, with an average gain of over 10% in the year following an election. Over a full presidential term, the stock market has gained an average of 61%, with only two periods of decline—following the 2004 and 2000 elections. The key takeaway is that market performance over an election cycle is shaped more by broader economic trends than by the election outcome itself.

Economic Indicators

Several key economic indicators have provided a positive backdrop for the financial markets:

1. Easing Inflation: The U.S. Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, showed further signs of easing in August. The index rose at an annual rate of 2.2%, slightly below expectations and marking the lowest reading since February 2021. Core inflation, which excludes volatile food and energy prices, also came in as expected at 2.7%. These figures suggest that inflationary pressures are gradually cooling, giving the Fed more confidence to continue its easing policy.

2. GDP Growth: The U.S. economy grew at an annual rate of 3.0% in the second quarter of the year, according to the government's latest estimate. This figure matched earlier estimates and exceeded economists' expectations, signaling that the economy remains robust despite concerns of a slowdown.

3. Unemployment: Weekly unemployment claims fell to 218,000, the lowest level in four months, further indicating a healthy labor market. A stronger labor market supports consumer spending, which is a critical driver of economic growth.

4. Consumer Sentiment: The University of Michigan's Consumer Sentiment Index rose to 70.1 in September, up from 67.9 in August. This marks the second consecutive monthly increase, reversing a recent downward trend and suggesting that consumers remain optimistic about the economic outlook.

Global Factors

The global economic landscape also played a role in market dynamics:

1. China Stimulus: Mainland Chinese stocks surged following the announcement of new stimulus measures by the People's Bank of China (PBOC). These measures include lowering borrowing costs, injecting liquidity into the economy, and easing mortgage repayment burdens for households. This stimulus is aimed at boosting growth in the world's second-largest economy, which has recently shown signs of sluggishness.

2. European Stock Gains: European stocks also performed well, with a key index rising by over 2% for the week. This gain was driven by better-than-expected inflation data from France and Spain, as well as optimism surrounding China's economic stimulus. Stocks in sectors such as chemicals and automobiles, which are sensitive to economic growth, were among the top performers.

Commodities and Oil Market

Oil prices have been on a downward trend, with U.S. crude oil falling nearly 4% for the week to under $69 per barrel. This represents a significant decline from the recent high of $84 per barrel in early July. The drop in oil prices can be attributed to a combination of easing demand and concerns about global economic growth. Despite this, the oil market remains relatively stable, with little change in prices year to date.

Market Outlook

As the markets head into October, investors are preparing for potential volatility, especially in light of upcoming economic data releases such as the nonfarm payrolls report and the ISM Manufacturing PMI. Both of these reports contributed to market sell-offs in early August and September, respectively, and could have a similar impact if they fall short of expectations.

Despite these risks, the overall market sentiment remains positive. The Federal Reserve's rate cuts, coupled with strong economic data and easing inflation, provide a supportive environment for continued market gains. However, the upcoming U.S. presidential election introduces an additional layer of uncertainty, and investors should brace for potential short-term volatility.

Last Week At A Glance

Week-Over-Week Snapshots

Volatility

In US stocks, the CBOE Volatility Index (VIX) shows an appreciable uptick, hinting at heightened expected volatility in the S&P 500. This trend of increased volatility is reflected across other indices such as NASDAQ 100 and DJIA, albeit with variations in the percentage changes. Non-US stocks, represented by ETFs like the EFA ETF and Emerging Markets ETF, also broadly exhibit changes in volatility, with the Emerging Markets ETF Volatility Index notably rising by 19.17%. In the commodities and currencies sectors, there is a marked rise in volatility for crude oil and gold, with crude oil ETF volatility surging by 22.97%. Currency volatility, illustrated by the EuroCurrency ETF, has risen as well. Additionally, volatility indices for individual stocks like Apple, Amazon, Google, IBM, and Goldman Sachs vary, with Amazon's volatility increasing by 22.9%. This data collectively points to a general increase in market volatility across various sectors and geographies.

ETFs

In the Stock Market ETF category, there's notable growth in regions like China (ASHR) which surged by 19.11%, and Southeast Asia (ASEA) which showed a decline of 0.62%. The United States (SPY) also exhibited a moderate increase. Among Major Industries ETFs, Technology (IXN) and Materials (MXI) sectors demonstrated notable gains, emphasizing a robust performance in these industries.

Conversely, in the Bonds, Commodities, and other ETFs section, while traditional safe-haven assets like US Treasury Bonds showed slight declines, the Natural Gas (UNG) ETF rose by 6.71%, and the Global X Lithium & Battery Tech ETF (LIT) increased significantly by 15.61%. This suggests a growing investor interest in energy and technology-focused commodities.

Overall, the snapshot indicates a mixed but dynamic market landscape with significant movements in technology and commodities sectors, alongside varied performances across global markets.

Crypto

Forex

Notably, the USD Index has declined by 3.0%, suggesting a weakening of the US dollar against a basket of other currencies. This decline is contrasted by gains in several European currencies such as the Swiss Franc (CHF) and the British Pound (GBP), which have increased by 1.14% and 0.39% respectively.

In the Asian Currency category, there are noteworthy increases in the Japanese Yen (JPY) and the Korean Won (KRW), while the Chinese Yuan (CNY) shows a modest rise. This could indicate stronger economic outlooks or market reactions in these regions.

The Commodity Currency group shows a mixed performance with the New Zealand Dollar (NZD) appreciating significantly by 1.65%, whereas the Russian Ruble (RUB) has seen a notable decline of 2.08%. Such movements can sometimes reflect changes in commodity prices, given these currencies often correlate with national export commodities.

Historically, forex market movements are often aligned with broader economic indicators and market sentiment. The weakening of the US dollar could suggest investor anticipation of less favorable economic conditions or policy shifts in the US. Similarly, the strength seen in currencies like the NZD could be tied to positive commodity market trends.

US Investor Sentiment

%Bull-Bear Spread

% Bull-Bear Spread is at 25.94%, compared to 24.42% last week and -3.31% last year. This is higher than the long-term average of 6.71%

1-Year View

5-Year View

NAAIM Exposure Index

The NAAIM Exposure Index (National Association of Active Investment Managers Exposure Index) measures the average exposure to U.S. equity markets as reported by its member firms. These are typically active money managers who provide their equity exposure levels weekly. The index offers insight into how much these managers are investing in equities at any given time, ranging from being fully short (-100%) to leveraged long (up to +200%).