WEEKLY MARKET SUMMARY
Global Equities: Investors rotated out of technology stocks and into other sectors during the week as the return on artificial intelligence investment was once again called into question. The Nasdaq Composite lagged other domestic large cap indices with a weekly loss of -1.6%, while the Dow Jones Industrial Average led with a 1.1% gain and the S&P 500 ended down -0.6%. Interest rate-sensitive small cap stocks performed well as the Fed’s rate cut provided an upside catalyst, ending the week up 1.2%. Shares of foreign developed market stocks gained 0.7% while emerging markets slipped -0.9%.
Fixed Income: Bond investors were skeptical of the Fed rate cut, pushing interest rates higher and bringing the 10-year Treasury yield to its highest level since early September at just under 4.2%. Despite the volatility in rates, US bond funds saw a sharp increase in demand with $3.5 billion in net inflows.
Commodities: Oil prices were down during the week despite escalating tensions between the US and Venezuela. US West Texas Intermediate crude ended the week at $57.55 a barrel. Gold prices reached a new all-time high of $4,384 on Friday before slipping to end the week at $4,327. Silver prices also hit new all-time highs above $60/oz during the week on appeal as both a safe-haven asset and a technology sector raw material.
WEEKLY ECONOMIC SUMMARY
Fed Cuts: The Fed delivered a 9-3 decision in favor of a 25 basis point rate cut, with two members favoring no cut and one calling for a larger, 50 basis point reduction. There was also some dissent over the future path of rates, with the consensus view that there will only be one cut in 2026 but seven members forecasting flat or higher rates in the coming year. The Fed expressed some optimism over the path of the economy as the GDP projection for 2026 increased from 1.8% in September to 2.3% and the inflation outlook improved from 2.6% to 2.4%. The biggest surprise was the announcement of $40 billion in T-Bill purchases, resuming the Fed’s quantitative easing policy less than two weeks after the Fed ended its balance sheet reduction program.
Jobs Data: In cutting rates, the Fed suggested that labor market weakness is a bigger worry than inflation, a sentiment which was also reflected in Chairman Powell’s comments. Powell stated that the Fed’s staff believes the Bureau of Labor statistics is overstating monthly job creation by approximately 60,000 jobs, which would put average monthly job growth at a negative 20,000. Weekly jobless claims surged by 44,000, to a larger-than-expected total of 236,000. While Powell refrained from using the term “stagflation”, the Fed is clearly worried that the economy is sputtering while inflation runs rampant.
AI Worries: The crowded artificial intelligence trade stalled this week as investors once again questioned whether AI represents a new era of productivity or just another overhyped bubble. Firms that have invested heavily in AI are being pressed to prove that their spending will pay off, and this week there were several disappointments. Broadcom (AVGO) shares plunged more than 10% after reporting a weak sales outlook and declining margins, while Oracle (ORCL) missed quarterly targets and added to its sizable debt burden for new data center investments. Credit default swaps on Oracle, used by investors to bet on or hedge against a potential credit event, rose to their highest levels since 2009.
CHART OF THE WEEK
The Chart of the Week shows the Fed’s “Dot Plot” forecast for interest rates over the coming years, with the median forecast highlighted for each year. Collectively, the Fed is only calling for one cut next year, but that consensus view masks the wide range of dissent among FOMC participants. President Trump will seek to replace Chairman Powell mid-year 2026 with a more agreeable Fed Chair, but the path of rate cuts (or hikes) remains highly uncertain amidst a weakening labor market and persistent inflation.
Commentary from VestGen Investment Management.