Stocks rose on Friday, with the S&P 500 and Nasdaq Composite closing at fresh record highs, as tech stocks rallied. Declining Treasury yields also provided a boost, as disappointing factory data and a decline in consumer sentiment solidified expectations for interest rate cuts from the Federal Reserve by this summer. For the week, the Nasdaq jumped 1.7% and the S&P advanced 0.9%, with both indexes notching their seventh positive week out of the past eight; the Dow Jones index lagged with a 0.1% weekly loss.
For those holding out hope the US Federal Reserve would start dropping interest rates later this month, the most recent inflation data surely dashed those expectations. The Fed’s preferred gauge of underlying inflation rose in January at the fastest pace in almost a year. The uptick highlights the bumpy road to fully containing price pressures, especially amid the backdrop of a robust labor market, strong growth and a resilient American consumer.
We ask why is the market so wound up over the Fed lowering interest rates?
Future Wealth’s View
It is counterintuitive when the labor market is strong and consumer spending remains robust, to complain about interest rates. While everyone focuses on the inverted yield curve and Phillips curve gone wrong, an esoteric British economist – William Beveridge highlights an inverse relationship between unemployment and vacancies (that is, open positions that businesses attempt to fill). His thesis is simple – As the economy improves, the sharp increase in job openings outpaces the decline in the unemployment rate. The Beveridge curve explains the anomalies that many economists are struggling with – how is unemployment not rising with a rise in interest rates?
The bottom line is that the US economy is too strong. We only have to thank the phenomenal companies who are constantly innovating the next big thing – first it was the PC, then it was software, then broadband, then internet, then smartphones, followed by electric cars and now it is Artificial Intelligence.
The lesson for all of us is that we have to invest in solid companies – not chase hot trends or the hot stocks. In the end, putting in the effort to discover good companies will ultimately result in better long term gains than telling everyone tomorrow that you bought Nvidia at $100.
A word of wisdom from the sage Warren Buffett – In investing, as in baseball, to put runs on the scoreboard, one must watch the playing field, not the scoreboard.