Last week, the three major US stock indices closed higher. On a weekly basis, the Dow Jones Industrial Average (DJIA) rose by 436.02 points, or 1.1%, to close at 38,675.68 points; the S&P 500 index increased by 27.83 points, or 0.5%, to close at 5,127.79 points; and the Nasdaq Composite Index (NASDAQ) gained 228.43 points, or 1.4%, to close at 16,156.33 points.

Key Takeaways:
The labor market played both the villain and the hero
Fed policy: From “when” to “if”

With a series of economic and earnings data released, the stock market rebounded after a tumultuous week. It was another busy earnings reporting week, and Apple's earnings report released after Thursday's trading session garnered positive reactions, seemingly helping drive a rebound in overall sentiment. While its revenue fell short of expectations, investors were also buoyed by Apple's announcement to repurchase $110 billion of its own shares, marking the largest buyback plan in history. Another notable performer for the week was Tesla, which surged over 15% on Monday after founder Elon Musk announced the preliminary approval by the Chinese government for the self-driving technology the company is developing.

The main driver of last week's gains appeared to be Friday morning's nonfarm payrolls report, which showed that employers added 175,000 jobs in April, below expectations and the lowest level since November. While the data indicated a cooling in the labor market, thereby easing inflationary pressures, investors were more pleased with an unexpected piece of good news: a slowdown in monthly wage growth, from 0.3% in March to 0.2% in April. The year-over-year growth rate fell to 3.9%, the slowest pace in nearly two years. Similarly, average weekly hours worked saw a slight decrease, while the unemployment rate edged up to 3.9%.

This news may have been particularly welcome as it followed some surprising upside inflation and (more notably) downside growth earlier in the week—a combination that exacerbated recent concerns over emerging "stagflation" trends. On Tuesday, the Labor Department reported a 1.2% increase in employment costs in the first quarter—an annual rate of nearly 5%—exceeding expectations and marking the fastest pace in a year.

Meanwhile, a gauge of business activity in the Chicago area fell to its lowest level since November 2022, and the Conference Board's measure of consumer confidence declined in April to its lowest point in nearly two years. The Labor Department's report on job openings in March showed a larger-than-expected decline to 8.5 million, the lowest level in over three years. On Friday, the Institute for Supply Management reported that its services sector activity gauge fell back into contraction territory for the first time since December 2022.

So far in 2024, inflation data indicate that inflationary pressures persist. At the news conference following the Federal Reserve's two-day policy meeting, Powell pushed back against stagflation concerns, stating, "I don't really understand where that's coming from," and citing current growth and inflation rates of around 3%. Powell also emphasized that while policymakers were not prepared to cut rates—as widely expected, rates were left unchanged at the meeting—neither did they see the need to raise rates, given the "sufficiently strict" current monetary policy stance. Thus, while the market debated at the start of 2024 which month rate cuts would begin and how many there would be, recent data have shifted that debate toward "will they or won't they cut this year?"

Speaking of holding rates at current levels for an extended period, prior instances offer some encouragement. The Fed held the federal funds rate steady from September 1992 to January 1994, with the stock market gaining 16% during that time. After aggressive rate hikes in 1994, the Fed maintained its policy rate from February 1996 to February 1997, with stocks rising 26% during that period. After a brief hike, the Fed paused again from March 1997 to August 1998, with stocks gaining 45%. The Fed remained on hold again from June 2006 to August 2007, with the S&P 500 returning 16% during that time. While recent market concerns have arisen with the prospect of delayed rate cuts, these examples suggest that an extended pause by the Fed does not necessarily have to be detrimental to market performance.

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Over the past month, the market has shown remarkable and encouraging resilience as interest rates have risen and expectations for Fed rate cuts have been deferred. In fact, the market has reduced its expectations for six Fed rate cuts in 2024 to just one over the past few months, with only a 5% pullback. We believe this reflects the continued favorable outlook for profit growth and significant upside potential for stocks this year. In contrast, similar or even smaller adjustments to Fed expectations over the past two years have resulted in significant negative reactions in stocks compared to the market.