Equities close above a milestone, while some question the economy.
The S&P 500 closed above 5,000 last week, which really is nothing more than a psychological happening. Markets often make new highs in a bull market cycle, but many are busy comparing the current market to previous peaks. However, there are some differences between prior peaks and the current market environment. The use of margin to purchase securities, which is considered speculative, is typically elevated in markets where "bubbles" have formed. Currently, margin levels are average, while prior peaks have been associated with levels two times higher. Volatility, both on the upside and downside, is lower today than in prior peaks - namely 2000 and 2007.
More important, is when and how the Fed begins to cut interest rates.
A slow pace of rate cuts, which the current economic data supports, would be positive for equities over the next several months. The labor market is strong, consumer spending is steady, financial conditions are favorable. However, we have seen higher equities for 14 of the last 15 trading weeks. A pullback in equities would be completely normal. We typically see dips of at least 3% during a calendar year approximately 72% of the time. Not to mention it's a presidential election year, which means we are likely to see volatility at some point. With inflation numbers on tap this week, don't be shocked if we see some choppy trading.
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