Record Highs for S&P 500 as Jobs Data Indicate a Cooling 'But Not Collapsing' Market

The U.S. stock market has continued its summer rally, with the S&P 500 index reaching another record high as investors evaluated the latest employment data.

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"The economy is cooling, but not collapsing," stated Andrew Slimmon, senior portfolio manager for U.S. equities at Morgan Stanley Investment Management, during a phone interview on Friday. "The market is not pricing in anything more than a slowdown."

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According to a report from the Bureau of Labor Statistics released on Friday, the U.S. economy added 206,000 jobs in June, while the unemployment rate slightly increased to 4.1%. Although job growth in the U.S. labor market is decelerating this year, the unemployment rate remains relatively low.

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The stock market's "tone" appears consistent with the belief that the Federal Reserve may begin reducing interest rates this year due to easing inflation, rather than making drastic cuts out of fear that the U.S. economy is plummeting, according to Slimmon. Traders in the federal-funds futures market largely anticipate the Fed to start cutting rates in September.

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On Friday, the S&P 500 SPX closed at 5,567.19 points, marking its 34th record close of the year, according to Dow Jones Market Data. The index has surged 16.7% so far in 2024, beginning July with gains.

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"We've had a narrow market," Slimmon remarked, referring to the limited group of Big Tech stocks driving the S&P 500's gains this year. Nonetheless, many other companies in the economy are "doing well fundamentally," even if their stocks have lagged, he noted.

"The setup going into earnings season remains pretty good," Slimmon added.

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Although "it's probably too early to really get aggressive on some of the cyclical areas" of the stock market, he mentioned that industrials and financials might see "a bounce" following upcoming corporate earnings reports for the second quarter.

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As a portfolio manager, Slimmon indicated he is "underweight" on defensive sectors of the stock market, such as consumer staples and utilities.

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While consumers have become "a little pickier" about their spending, they haven't ceased spending, which he described as "good news" for the Fed's inflation efforts. "Consumers are pushing back on prices," he said.

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Investors will receive a June inflation update from the consumer-price index next week, with the CPI report scheduled for release on July 11. The Fed has maintained elevated rates to achieve a durable reduction in inflation to its 2% annual target.

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On Friday, fed-funds futures indicated a 71.1% chance that the Fed will lower its benchmark rate by a quarter percentage point in September, from the current range of 5.25% to 5.5%, according to the CME FedWatch Tool, as of the last check.

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The U.S. stock market closed higher on Friday, with the Dow Jones Industrial Average DJIA rising 0.2%, the S&P 500 SPX gaining 0.5%, and the tech-heavy Nasdaq Composite COMP advancing 0.9%. All three indexes posted weekly gains, with the Nasdaq climbing for the fifth consecutive week.

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Slimmon emphasized that while the broader market has been driven by a few big tech names, the underlying fundamentals of many other companies remain strong. This divergence suggests that while there may be caution in the broader market, there are pockets of strength and potential opportunities, particularly as the earnings season unfolds.

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He also pointed out that industrials and financials could experience a positive impact following the second-quarter earnings reports, suggesting these sectors might be poised for a rebound. This is particularly relevant as these sectors often reflect broader economic trends and can indicate underlying economic health.

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Despite being cautious about defensive sectors like consumer staples and utilities, Slimmon remains optimistic about the consumer sector. He notes that although consumers are more selective with their spending, they continue to spend, which is beneficial for the economy and the Fed’s ongoing efforts to manage inflation.

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Looking ahead, next week’s consumer-price index report for June will be crucial for investors, providing more insight into the inflation trajectory and potential Fed actions. The Fed's strategy to keep interest rates elevated is aimed at ensuring inflation decreases to its target rate, and the upcoming CPI data will be a significant indicator of progress in this area.

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With the S&P 500 reaching its 34th record close this year and showing substantial gains since the beginning of 2024, the market sentiment remains cautiously optimistic. The anticipation of a potential rate cut by the Fed in September is a focal point for investors, reflecting a nuanced view of economic conditions: cooling but not collapsing.

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In summary, while the U.S. stock market continues to set records, the economic backdrop is one of moderation rather than severe downturn, with selective consumer spending and potential rate adjustments shaping the investment landscape.

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