Inflation relief was palpable this week, with both the producer price index and consumer price index reinforcing that inflation is trending down. The real issue for the market was an emerging “growth slowdown” narrative, and fears about how far it would go. Today’s retail sales report (up 1.0% month over month, up 0.4% ex-autos, well above expectations of an 0.3% and 0.1% gain, respectively) and strong commentary on the consumer by Walmart reinforces that the consumer may be slowing, but is still resilient. Bottom line: the soft landing is very much alive. Where the markets are now The S & P 500 has executed a complete round trip, from roughly 5,500 just prior to the jobs report, to the 5,186 close on Aug. 5, and now back to roughly 5,500. .SPX 1M mountain S & P 500 Index over the past month. Same with CBOE Volatility Index (VIX) . It’s made a complete round trip in the same period. Fear spiked to levels not seen since Covid, and then quickly receded, moving from 15 to 60 to 15. This has all happened while market sentiment has remained mostly neutral. One investor sentiment gauge, the weekly survey of investors for the American Association of Individual Investors, is largely neutral: Bulls vs. Bears (AAII weekly survey, ended Aug. 14) Bullish 42.5% (historic avg. 37.5%) Neutral 28.6% (historic avg. 31.5%) Bearish 28.9% (historic avg. 31.0%) Source: AAII During periods of euphoria, bullish levels go into the low 50s, so a reading in the low 40s is well below euphoria. Let’s look at other measures of the market: Inflation: Trending lower Interest rates: Rate cuts expected Growth: Slowing but no recession (Atlanta Fed projects Q3 GDP at 2.9%) Earnings: Holding The fact that earnings growth estimates are holding up is critical. S & P 500 earnings growth of 10% is expected in 2024, and 15% growth is seen for 2025. These estimates are little changed in recent months. True, revenue growth hasn’t been as strong, and much of the reason earnings are holding up is cost cutting. That, and the need for more revenue, is a clear issue for 2025. Regardless, inflation is moderating. Growth is slowing, but no recession is apparent Interest rate cuts coming and earnings are still holding up. That is practically the definition of the soft landing. If none of that impresses you, here is Walmart CFO John David Rainey in a CNBC interview: “In this environment, it’s responsible or prudent to be a little bit guarded with the outlook, but we’re not projecting a recession.”
