by Professor Jeremy J. Siegel, Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
The story that captured all media attention last week was Donald Trump’s guilty verdict. But the Trump conviction had no effect on the markets or predicted probabilities in betting markets for him becoming president. The key political consideration I am focused on is whether Republicans can gain control of the presidency, House, and Senate, as the Trump tax cuts expire at the end of 2025 and can only be extended in their current form if the GOP takes all three.
While Trump may be marginally better for stocks than Biden given their corporate tax policies and attitudes toward regulation, the difference is not substantial. What I think will truly move markets is the fundamental outlook for the economy, earnings, and the Fed's actions.
Q2 GDP estimates have been downgraded to the mid-2% range from the mid-3% range earlier, mostly reflecting the ballooning trade deficit. However, the economy is not falling apart, with jobless claims remaining right in the middle of our sweet spot of 200,000-240,000.
The recent inflation data provided some relief, showing a moderate pace and the details within the latest PCE report were actually quite good.
Despite the downgrade in GDP, the markets have shown resilience. Overall, corporate earnings held up reasonably well (particularly with a sluggish Q1 GDP) which bodes well for the outlook ahead. Earnings in the retail sector last week were mixed and reflected a divide between those innovative firms best capturing consumer trends and those that did not.
As we approach the next FOMC meeting, all eyes will be on projections and the dot plot for the future policy. I am pleased commodity prices have experienced a recent downturn, with oil and copper prices decreasing significantly, which should positively impact future inflation readings. I remain convinced the trends in housing and shelter inflation will also facilitate inflation softening.
I don't foresee a recession, but rather a slowdown. This week's employment report will be crucial. A very low number could prompt several interest rate cuts later this year if wages remain under control.
The stock market is holding up well, but a shift towards value and small-cap stocks may not occur until there is certainty around Fed rate cuts. Overall, the economy is set up for a more comfortable outlook on rates based on recent data, but incoming reports will determine if that expectation holds.
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