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Stock Market Insights: Economic tests – surviving and thriving
Dr. Richard Baker, AIF®, is the CEO and executive wealth advisor at Fervent Wealth Management.
My kids are far enough into the new school semester that they are starting to take tests. They don’t like them, but they are a necessary evil in education. It seems to me that the U.S. economy and stock market have also been tested lately. Investors don’t like the economic tests any more than my kids like their school tests, but they are also a necessary evil to show us how strong of a foundation markets have for future growth.
The Federal Reserve (Fed) is ready to pat itself on the back. They may have steered the U.S. through a difficult season with one of its most aggressive rate-tightening campaigns in history. The unprecedented fast pace of raising rates in 2022 and 2023 was a tough test for the U.S. economy, leading many (including me) to fear they were steering us into a recession. Yet, the economy survived with the help of American consumers, who continued to spend even as rates continued to rise. How did consumers do it? An over-generous pandemic stimulus helped, and so did low fixed-rate mortgages, which helped homeowners avoid the punch of high rates. Regardless of how consumers could afford to keep spending like they did, the economy passed this test.
The economy also seems to have passed its inflation test. The often-quoted Consumer Price Index (CPI) dropped to 2.5% last month after having peaked at over 9% in June 2022. However, the Fed’s preferred inflation measure (core personal consumption, which excludes food and energy) inched up some in August. Of course, this doesn’t mean prices are returning to what they were three years ago, but it does mean that they are not continuing to rise as quickly. In response, the 10-year Treasury yield is down nearly a whole percentage point since its April 2024 high, and mortgage rates are down even more. I wouldn’t say this test has been passed yet; it’s more of an incomplete.
The stock market also passed a tough test recently. On August 5, the July jobs report was weaker than expected, and traders overborrowing in the Japanese yen caused a sharp market drop. Stocks have bounced back since then, though, with much volatility. The major stock market benchmarks produced modest positive returns in August. In a nice twist, the positive returns weren’t led by the big tech companies but by several parts of the market, which shows that the performance has broadened.
Most Americans understand that the toughest test for markets will come in November. The upcoming presidential election and uncertainty in future policy could spark a market correction. Should China, Russia, or Iran stir things up, there is also the looming potential for a geopolitical test. These tough tests may cause more volatility in the near future, but markets have long-term solid track records.
My kids follow in my wife's footsteps with grades. She was always a straight-A student, while I didn’t get straight A’s until my doctoral program. Our kids do it in completely different ways. One has to study for hours to ace a test, while the other child often forgets they have a test and makes an A without studying at all. I don’t know if the economy will get an A in its upcoming tests, but I’m confident we will still like the report card. Like my kid, it just might take a little more effort to work the grade up to an A.
Have a blessed week!
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly.
The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
