June 10, 2024

“In many ways, the stock market is like the weather if you don’t like the current conditions all you have to do is wait awhile”

Low Simpson

Picking up on the weather theme, as many parts of the country recover from devastating tornadoes Memorial Day weekend, me included, the markets finish after a bit of a whirlwind. Here are the numbers: The S&P 500 finished up .94%, Down Jones Industrial Average gained .59% the Nasdaq returned to the lead up 1.59%. Internationally, despite the Central Bank cutting rates the FTSE 100 was flat off .36% and the MSCI-EAFE off. O8%. 2-YEAR Treasury finish Friday with a yield of 4.889% and the 10-year paid 4.434%.

This week Wednesday will be instructive as two events will impact the markets, one the inflation numbers and two, the Federal Reserve reaction and comments. So expect some mid-week fireworks.

So, what was the big news? Economically, As Market Watch Reports, The Institute for Supply Management said last Wednesday that its service-sector PMI rebounded to 53.8% in May from 49.4% in the prior month. Economists polled by the Wall Street Journal had expected the ISM index to inch higher to 50.7%. Numbers over 50% indicate expansion in the economy.

The ISM index dipped into contraction territory in April for the first time since December 2022.A measure of new orders rose to 54.1% in May from 52.2% in the prior month.

A measure of prices paid for services for inputs cooled slightly to 58.1% after jumping to 59.2% in the prior month. Thirteen service industries reported growth in May, while five reported a decrease in activity. Jobs report was hotter than expected and on the flip side, the number of Americans who applied for unemployment benefits last week rose to a four-week high of 229,000 — likely due to the Memorial Day holiday and end of the school year — but there was little sign of rising layoffs. Businesses are not hiring as many workers, but they also aren’t cutting many jobs. Sales are still pretty strong and good help is hard to find, giving firms little incentive to shrink staff. If most adults are working, they are likely to keep spending at levels sufficient to keep the economy growing. New claims increased from 221,000 in the prior week. Economists polled by the Wall Street Journal had forecast new claims to total 219,000 in the seven days ending June 1, based on seasonally adjusted figures. Initial jobless claims have hovered between 194,000 and 232,000 this year, a remarkably low level last achieved consistently in the 1960s.

New jobless claims fell in 31 of the 53 states and territories that report these figures to the federal government. Claims rose in 22 others.

The S&P 500 surged 5.0% in May, reversing April’s 4.1% drop. All 17 of S&P’s featured factor indices rose but only 3 outperformed the S&P 500. Among the best performers for the month were a handful of factors that also outperformed over the last 12 months, while May’s underperformers lagged the S&P 500 over the last 12 months as well. S&P 500 Momentum led the pack, outperforming the S&P 500 by more than 2% in May, and by more than 27% over the last year. When it comes to measures of the market, May’s elephant in the room is concentration: currently, the combined weight of the top-10 largest constituents in the S&P 500 sums to 34%, the highest in multiple decades. With such a level of concentration, the landscape for factors, which typically tilt away from market cap, remains challenging.

A recent report issued by Vanguard closely mirrors our view on what lies ahead. So, forgive me for not recreating the wheel, Vanguard gave their outlook going forward in 2024 highlighting Value over Growth stocks, further Vanguard believes inflation isn’t yet on a sustainable path toward the Fed’s 2.0% target. Their view is that the Fed won’t likely be in position to cut its monetary policy interest rate target this year. Vanguard continues to forecast about 4% average 2024 GDP growth for emerging markets worldwide. In Europe, stronger growth momentum, higher energy prices, and a more hawkish outlook for the U.S. Federal Reserve have led Vanguard to raise their outlook for the European Central Bank (ECB) deposit facility rate at year-end. Vanguard also increased their forecasts for full-year GDP growth and core inflation. They foresee two more ECB quarter-point rate cuts this year, down from our previous outlook for five such cuts. That would leave the key monetary policy rate at 3.25% at year-end. After last week’s rate cut, Vanguard continues to anticipate those two other cuts in 2024. The question is will the FED Follow suit? Looking less likely or at least in no hurry.

Why? Inflation isn’t yet on a sustainable path toward the Federal Reserve’s 2.0% target. The headline Consumer Price Index rose 3.4% year-over-year and 0.3% month-over-month in April. Core inflation, which excludes volatile food and energy prices, remained elevated, at 3.6% year-over-year and 0.3% month-over-month.

Another closely watched indicator, retail sales volumes, changed little in April compared with March. The pace of sales matters, and Vanguard will watch this indicator closely. But we continue to believe the U.S. consumer remains resilient and will be a catalyst for growth, as this recent article discusses.

On top of a greater-than-expected rise in producer prices (0.50% month-over-month) in April, the data underscore Vanguards and our view that the Fed won’t likely be in position to cut its monetary policy interest rate target (currently, 5.25%–5.50%) this year.

Vanguard recently increased our forecast for 2024 core Personal Consumption Expenditures (PCE) price index inflation from 2.6% to 2.9%. The PCE is the Fed’s preferred inflation measure to guide policymaking.

Over in the bond market last week, the rally continued. Treasury yields fell—as their prices rose—for the fifth-straight trading session. The yield on the 10-year U.S. Treasury note is down 0.33 percentage point, to 4.29%, in that span but finished last Friday back up at 4.43%.

In other depressing news, not only for young people trying to buy their first home (which is their number one issue going into the presidential election), Mortgage rates rose for the second week in a row, despite signs of a slowing U.S. economy. The 30-year mortgage inched up to the highest level since May 10. The increase in rates caused the market composite index — a measure of mortgage application volume — to decrease in the past week, according to the Mortgage Bankers Association (MBA) on Wednesday.

Finally, Disposable personal incomes, the main support for spending, have been under pressure. The latest data, released last Friday, showed that after taking inflation into account, disposable income fell 0.1% in April from the preceding month, the second decline in the past three months. The personal savings rate was 3.6% in both April and March, the lowest since December 2022.

So, as we plod along through the summer, we expect our defensive value positions and increasing intermediate term bond rotation to continue.

Mike