Highlights from John Lynch's August 2024 Comerica Wealth Management Monthly Review
Monetary Policy and Market Dynamics
- Monetary Policy Impact: John Lynch highlighted the market's reaction to the Federal Reserve's monetary policy, noting that "monetary policy is also adding to the market's discontent." He pointed out that despite the Fed keeping interest rates steady at the July meeting, the weaker-than-expected July Employment Report caused market disruption, with expectations for rate cuts increasing significantly[1].
- Interest Rate Forecast: Lynch forecasts up to four quarter-point cuts in the coming months, which he believes will align the Fed's overnight lending rates with nominal GDP growth, making monetary policy less restrictive[1].
Economic Outlook
- GDP and Employment: The U.S. economy showed mixed signals, with second-quarter GDP rising by 2.8%, which was better than expected. However, the employment data was concerning, with only 114,000 jobs created in July, far below the forecast of 175,000. Lynch noted the potential distortion of data due to Hurricane Beryl and attributed the rise in unemployment to new labor force entrants[1].
- Recession Fears: Lynch addressed fears of a recession, stating, "We're not convinced that a 'miss' of 60,000 jobs portends imminent disaster for the U.S. economy," suggesting that the weaker employment report does not necessarily indicate an impending recession[1].
Fixed Income and Treasury Market
- Volatility in Fixed Income: The U.S. Treasury market remained volatile, with yields falling in July, driven by expectations of Fed rate cuts. Lynch noted that the 2-year yield's significant drop below the fed funds rate was a "definitive market message that the Fed must reduce rates soon"[1].
Equities Market
- Market Rotation: Lynch observed a shift in equity market leadership, with the "Magnificent Seven" stocks losing favor as investors reallocated to lagging stocks. The S&P 500® Index gained 1.2% in July, while the equal-weight S&P 500® Index rose by approximately 4.4%, indicating improved market breadth[1].
- Sector Performance: Interest rate-sensitive sectors like Real Estate, Utilities, and Financials outperformed, while sectors such as Communication Services and Information Technology declined. Lynch noted that the small-cap rally was particularly strong, with the Russell 2000® Index gaining over 10% in July[1].
Global Economic Developments
- Central Bank Actions: Lynch discussed global central bank activities, including the Bank of Japan's interest rate hike and the People's Bank of China's rate cuts. He highlighted the BOJ's move as a response to the weak yen and noted that the PBOC's rate cuts were part of efforts to address economic pressures[1].
Footnote: [1] Comerica-John-Lynch-CIO-202408-CIM.pdf (view / download below)
