The Markets
Americans may be witnessing something remarkable.
Earlier this year, we had the relatively rare opportunity to view a total solar eclipse – when the moon passes between the sun and the Earth, blocking the sun completely – as it crossed numerous states. Now, we may see the United States’ economy experience a soft landing – when the Federal Reserve raises rates to fight inflation and does not cause a recession.
“According to the conventional wisdom, the Federal Reserve has managed to achieve only one soft landing in the past 60 years—in 1994–1995,” wrote economist Alan Blinder in an abstract for the Journal of Economic Perspectives.
Blinder’s research suggests that soft landings are more common than conventional wisdom suggests – but not easy to achieve. From 1965 to 2022, the Federal Reserve tightened monetary policy to fight inflation eleven times. In five cases, the Fed achieved a soft or softish landing. It appears that the Fed may be about to add another soft landing to the list.
The U.S. economy grew 2.8 percent in the second quarter of 2024 (after inflation), which is faster than economists expected. The economy grew as businesses continued to invest and consumers continued to spend on goods and services, according to figures released last week by the U.S. Department of Commerce.
“A robust economy is a good sign for the average consumer, and because it came in tandem with positive data on prices, it is in line with the soft landing of a healthy economy and cooling inflation that Federal Reserve officials are looking to achieve. Economists consider real GDP growth rates of between 2% and 3% to be healthy in developed economies…The personal consumption expenditures price index increased 2.6% during the second quarter—the slowest pace since the first quarter of 2021. That is a marked slowdown from the 3.4% pace recorded in the first three months of the year,” reported Megan Leonhardt of Barron’s.
Markets moved lower early in the week and then regained some lost ground after economic growth and inflation figures were released, reported Connor Smith of Barron’s. By the end of the week, the Dow Jones Industrial Average was up, while the Standard & Poor’s 500 Index and Nasdaq Composites indexes finished the week lower. Yields on most maturities of U.S. Treasuries moved lower over the week.
Data as of 7/26/24 | 1-Week | Y-T-D | 1-Year | 3-Year | 5-Year | 10-Year |
Standard & Poor's 500 Index | -0.8% | 14.5% | 19.5% | 7.3% | 12.5% | 10.7% |
Dow Jones Global ex-U.S. Index | -1.1 | 4.5 | 6.0 | -1.7 | 3.3 | 1.6 |
10-year Treasury Note (yield only) | 4.2 | N/A | 3.9 | 1.3 | 2.1 | 2.5 |
Gold (per ounce) | -0.7 | 14.8 | 21.4 | 9.9 | 10.9 | 6.2 |
Bloomberg Commodity Index | -1.6 | -2.7 | -10.8 | -0.2 | 4.0 | -2.9 |
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
HOW CAN INVESTORS FIGHT INFLATION? Inflation is the steady increase in prices over time. After years of relatively low inflation, the last couple of years have been an important reminder that investors need to consider inflation as they invest for the future. Even at the Fed’s target level, prices rise slightly each year. A financial plan and a well-diversified portfolio can help investors beat inflation as they save and invest. See what you know about inflation and investments by taking this brief quiz.
Part of the Federal Reserve’s mission is keeping prices from rising or falling too fast. What do Fed officials think is the right rate for inflation?
0%
1%
2%
3%
Inflation erodes spending power, which means that the amount of goods or services that a person on a fixed income can buy gets smaller when inflation is higher. Which of the following can help investors manage the risks associated with inflation?
Cash under the mattress
A diversified portfolio
Certificates of deposit
Fixed rate loans
A “real” rate of return is the annual return that an investment earns minus the annual rate of inflation. If the average annual return for the Standard & Poor’s 500 Index was 10 percent over the last ten years, and inflation averaged 3 percent a year over the same period, what was the “real” average annual return over that period?
16 percent
13 percent
10 percent
7 percent
What is the highest rate of inflation the United States has experienced since 1917 when the Consumer Price Index was introduced?
20.5 percent in 1917
9.5 percent in 1951
14.6 percent in 1980
8.9 percent in 2022
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Weekly Focus – Think About It
“The past is always tense, the future perfect."
― Zadie Smith, Novelist
Answers: 1) c; 2) b; 3) d; 4) a
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