Stock markets gained for the second week in a row with the Fed’s first rate cut since 2020 and strong manufacturing numbers. The S&P 500 gained 1.39% for the week, hitting its 39th all-time high of 2024. The Dow Jones Industrial Average (DJIA) gained 1.67% and closed above 42,000 for the first time. Mid and small-cap companies found some solid ground and were up 2.30% and 2.27%, respectively.

At their meeting last Wednesday, the Federal Reserve dropped the Fed funds rate by 0.50% to a range of 4.75%-5.00%. The decision to opt for a more aggressive 0.50% cut over a 0.25% cut was driven by the Fed’s concern about the speed of the recent rise in unemployment and decline in monthly job gains. Faster cuts early in the process should reinvigorate job growth and stabilize the unemployment rate at a quicker pace. For a little history, in March of 2020, the Fed lowered rates to almost zero loosening monetary policy to support the economy with the onset of Covid-19. By 2022, the Fed started hiking interest rates, tightening monetary policy, to combat inflation which had reached its highest point in 23 years. As inflation and unemployment have been slowly working their way towards the Fed target numbers, we are finally at a point now where the Fed feels it appropriate to start reducing interest rates and we saw the first step in loosening monetary policy.

What is the Fed thinking going forward from here? The “dot plot” shows the Fed lowering rates another 0.50% by the end of 2024 to a range of 4.25% - 4.50%, then dropping another full percentage point by the end of 2025, and then cutting another 0.50% by the end of 2026 down to bring short-term rates to around 2.9%. Despite the decision to go with a more aggressive initial rate cut, Fed Chairman Jerome Powell remained constructive on the outlook stating, “there’s nothing in the SEP (Summary of Economic Projections) that suggests the committee is in a rush to get this done.”

Last week’s economic data all bolstered the perspective that the economy remains on a stable footing. The NY Fed Empire Manufacturing Survey came in at 11.5, beating forecasts of -5.0. This is the first reading of growth in almost a year. New Orders Index came in at 9.4, 17.3 above the previous months report and shipments jumped to 17.9 from 0.3 in the previous reporting period. Forty-five percent of respondents expect conditions to improve over the next six months. Consumers showed increased confidence ahead of the Federal Reserve meeting as retail sales for August came in 0.3% higher than expected, according to Dow Jones. In addition, July headline sales were revised up slightly to 1.1%.

Unemployment trends also showed signs of further improvement based on weekly data. Initial jobless claims came in at 219K last week, lower than expectations of 230K as well as lower than the revised previous week of 231K. Similarly, continuing claims were better than expected.

This week we get reports on consumer confidence, which are expected to increase slightly on optimism that the economy can reach a soft landing while interest rates go down. Housing-related reports will be out and are also expected to be up, reflecting increased affordability as mortgage rates have eased lower.