By Logan Gilland, CFP®
Markets can tend to reward the resilient, so I want to commend all of you out there that gained some fresh seasoning this last week. We thought it would be a big week in markets and it certainly did not disappoint. However, if you looked at last Monday’s open and Friday’s close you would think it was a snooze fest. There were more headlines this last week than is possible to count, so I did my best to translate the big things we are watching.
The Fed Held Rates Steady, But It Was Close
What Happened:
The Fed voted 9-3 to keep rates at 3.50%-3.75% for a fifth straight meeting. Three regional presidents dissented, pushing for a hike instead. New Chair Kevin Warsh called it “a good family fight” and made clear this isn’t a settled pause.
What Does It Mean?
The committee is genuinely split. Inflation has stayed stubbornly above target, partly due to the Iran conflict keeping oil elevated (despite a small drop in oil this week compared to last), and bond markets started pricing in better odds of a September hike after the meeting this week. At the same time, long-term bond rates increased as well. Warsh continued to emphasize that they wanted to reduce inflation while not giving clear signs to the market in between FED meetings.
Why Do We Care?
Markets hate uncertainty, and the Fed flagging inflation concerns, a quarter of the committee wanting rates to rise, and skipping the kind of forward guidance the previous Fed leaned on all added a healthy dose of uncertainty to a market that had already been struggling the last couple of weeks. Markets threw a fit after the meeting on Wednesday, with the Dow down over 1,000 points, its worst day since the tariff headlines last April. The S&P 500 (SPX) ended down 1.5% while the Nasdaq was down about 2% as well. Although the decline was quickly bought up to close the week, Warsh’s annual meeting at Jackson Hole and any economic data will be under a microscope in the weeks to come.
Big Tech Earnings Whipsawed the AI Trade
What Happened:
Alphabet’s (Google’s parent company) spending plans spooked investors early in the week, dragging AI-linked stocks down. Then Thursday, Microsoft surged 16% in a single day on strong results bringing the AI trade and the market back from what felt like the brink on Wednesday. Friday, Amazon jumped nearly 13% premarket on an earnings beat, while Apple fell over 7% on weak Services and China numbers.
What Does It Mean?
The market is actively trying to sort AI winners from losers in real time, stock by stock, earnings report by earnings report. As companies report strong earnings, there is also major concern that those same companies are turning around and investing all of their hard earned dollars back into AI investment that may or may not pay off.
Why Do We Care?
Imagine your neighborhood lemonade stand. The neighborhood kids are selling lemonade like hotcakes (fresh squeezed, of course, not just Countrytime), however, every dollar they are pulling in they are using to build another stand the street over. The cash flow for their business is zero, so it is really hard to put a valuation on what that business is worth. However, if all those dollars building the next stand pay off, and second street sells just like the first, the company will be worth significantly more in the future. Thus the back and forth of the market, which to some degree likes the AI investment but at the same time is concerned that the lemonade may not pay off like they hoped.
Oil and Geopolitics Are Still a Wildcard
What Happened:
Renewed U.S.-Iran tensions spooked the market this last week with another round of peace, no-peace, peace again. However, at the end of the week oil was lower than it was last Friday.
What Does It Mean?
Energy prices feed straight into inflation data, which feeds straight into what the Fed does next. However, we did get some lower than expected inflation data on Thursday which I believe helped the market on the bounce back. The war and back and forth will continue to be a topic of conversation as it drags on.
Why Do We Care?
This last week I had a college student come in for a couple of days to shadow me and learn more about the business. We talked through the impact that oil has on the stock market. Although I have talked about it before, I think it is valuable to bring up. Not only does increased oil prices lead to higher inflation, which leads the Fed to potentially raise interest rates to fight that inflation, but it also impacts markets on a much more basic human behavior level. I asked this student how oil in the Middle East impacts a company like Netflix. After some thinking through, he very astutely mentioned that as oil prices rise, gas prices rise, and as gas prices rise, consumers (me and you) ultimately have to change our behavior. This typically does not all happen at once but over time we start to have to make cuts to the budget. So maybe those cuts come in the form of eating out less, or waiting on a big purchase, or cutting a subscription service. The longer these elevated prices continue, the more individuals have to make these trade offs. I am hopeful some resolution comes soon before this decision making seeps deeper into the economy.
Bottom Line
This last week felt like my church league softball game last week. We got smoked for the first 4 innings and were down big (13-0 to be precise). However, after one good hit in the 5th inning, we got rolling again and scored a quick 10 runs. We still do not know what the outcome of the game will be in the coming days or weeks, but we can enjoy the bounce and the rally back. I certainly do not think it is time to unbuckle the seatbelts, but we will take the turnaround.
Talk again soon,
Logan
Logan Gilland, CFP®, is Director of Wealth Management at Bluespring Wealth’s Lexington office, where he helps clients turn financial goals into practical plans. He also shares straightforward financial guidance through the DIY Money podcast, Savings & Sense radio show, and his weekly newsletter, Logan’s Lens. Outside the office, Logan and his wife, Hannah, enjoy hosting friends and planning their next national park trip.
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