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Stocks Flat
The S&P 500 and the NASDAQ posted weekly gains of 0.6% and 1.5%, respectively, as both indexes set record highs and rebounded from the previous week’s slight declines. The Dow slipped 0.1% and ended up 1.5% shy of its record set last December.
Earnings from the first three major U.S. banks to report second-quarter results exceeded analysts’ expectations owing in part to a surge in investment banking income. As of Friday, analysts were forecasting that financials sector earnings rose 8.6% — above the 5.6% growth forecast across all sectors in the S&P 500, according to FactSet.
A pair of reports presented a mixed picture of inflation at the consumer and wholesale levels. The Consumer Price Index showed prices rose at an annual rate of 2.7% in June compared with 2.4% in May, potentially indicating that costs from higher tariffs have cycled across the broader economy. However, June’s wholesale prices were up just 2.3% from a year earlier — the smallest year-over-year gain since last September.
U.S. retail sales posted a bigger-than-expected rise after falling sharply the previous month, as sales climbed 0.6% in June following a 0.9% decline in May. Retail sales figures aren’t adjusted for inflation, so June’s sales increase could be partly attributed to price increases amid elevated tariffs.
The yield of the U.S. 30-year Treasury bond recorded its fourth weekly gain in a row after briefly climbing as high as 5.07% on Tuesday. While the 30-year yield also touched 5.00% two months earlier, it hasn’t remained above that threshold for an extended period since 2007.
A gauge of U.S. consumer sentiment rose slightly relative to the previous month’s reading although it remained well below a recent peak reached last December. Friday’s preliminary monthly report from the University of Michigan Index of Consumer Sentiment also showed a recent decrease in consumers’ inflation expectations.
The U.S. dollar rose for the third week in a row relative to a basket of major foreign currencies. Despite the dollar’s recent gains, it remained down about 9% on a year-to-date basis, owing largely to sharp declines in March and April amid tariff-related market volatility.
Bond market trading on Friday continued to support expectations that the U.S. Federal Reserve is unlikely to cut interest rates at its two-day meeting ending July 30. Prices in interest rate futures markets implied that most investors were expecting two quarter-point rate cuts by year end, with the first cut expected at the Fed’s mid-September meeting, according to CME Group’s FedWatch tool.
Source: John Hancock Investment Management
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Recent tensions between the White House and Federal Reserve have brought the topic of Fed independence into focus. This is because there can be a natural friction between elected officials and the Fed, since they each have unique goals and incentives.
For instance, the President and Congress often prefer lower interest rates to spur economic growth and help fund the federal budget. In contrast, the Fed may need to make difficult choices around issues such as inflation and financial stability, based on longer-term considerations.
The Fed is not without its critics, and there are countless history books detailing both the successes and failures of different Fed chairs. Still, Fed independence has been an important aspect of the financial system for decades. Today, much of the discussion on this topic centers around the legality of whether the President can fire a sitting Fed chair, the mechanics of what happens in that situation, and speculation over who would be nominated next.
The accompanying chart shows the nine Fed chairs appointed since 1948. Nearly all served under presidents of both parties, including re-nominations by other presidents. Jerome Powell, for instance, was originally nominated by President Trump in 2017, and was confirmed for a second term under President Biden. This chart also makes it clear that the economy has grown under different Fed chairs nominated by each party.
The concept of Fed independence is often taken for granted, so it’s helpful to briefly understand its history. As the country's central bank, the Fed sets monetary policy and oversees the stability of the financial system. Independence means the Fed is free from political pressure, allowing it to make decisions based only on the economy and financial system.
This independence has developed over time. The Fed was not established by the Constitution, but rather by the Federal Reserve Act of 1913 passed by Congress. The Fed has a dual mandate which has also evolved over time and is often interpreted as a) maintaining low unemployment, and b) an inflation target of 2%. Thus, the way monetary policy is conducted today is influenced by historical economic events including recessions and inflationary periods.
Following the Great Depression, the Banking Act of 1935 restructured the Fed, centralizing power within the Board of Governors and removing the Treasury Secretary from the Board to reduce political influence. During World War II, the Fed surrendered some independence by maintaining low interest rates to help finance the war effort. This continued until the 1951 Treasury-Fed Accord, which is widely regarded as re-establishing Fed independence by ending its obligation to support government bond prices.
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In 2010, Nobel Laureates Daniel Kahneman and Sir Angus Deaton investigated how money influences happiness. They measured as people’s daily sense of emotional well-being and their lifetime sense of accomplishment as proxies for happiness. The pair concluded that, “More money does not necessarily buy more happiness, but less money is associated with emotional pain.” In addition, the emotional benefits of earning more money leveled off when income reached $75,000. (The real median income in the United States was about $66,700 in 2010, according to the U.S. Census Bureau via FRED.)
In 2021, the relationship between money and happiness was revisited by Matthew Killingsworth, a senior fellow at the Wharton School. The study found, “Larger incomes were robustly associated with both greater experienced well-being and greater evaluative well-being…There was no observed plateau in experienced well-being…either around $75,000/year or at any other income level.” (The real median household income in the U.S. was about $79,200 in 2021, according to the U.S. Census Bureau via FRED.)
To try and understand the contradiction in findings, Kahneman and Killingsworth engaged in an adversarial collaboration mediated by Wharton professor Barbara Mellers. After reviewing the data sets, they concluded, “In the low range of incomes, unhappy people gain more from increased income than happier people do. In other words, the bottom of the happiness distribution rises much faster than the top in that range of incomes. The trend is reversed for higher incomes, where very happy people gain much more from increased income than unhappy people do.”
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AJ Advisors
www.ajadvice.com
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Phone: (615) 709-8709
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John Stauffer, CFP®
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Andrew Quinn, CFP®
Partner
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