June 24, 2024

“When it comes to investing, we want our money to grow with the highest rates of return, and the lowest risk possible. While there are no shortcuts to getting rich, there are smart ways to go about it.”

Phil Town

While as we close in on the end of the second quarter and the beginning of summer, so far 2024, from an investment perspective, has not been so bad. Here are the numbers for last week. The S&P 500 gained .75%, the Dow Jones Industrial Average led the major indexes up 1.61%, the Nasdaq was up slightly .39%. Internationally, the FTSE 100 had a good week up 1.12% and the broad MSCI-EAFA added slightly up .19%. The 2-year Treasury closed at 4.743% and the 10-year paid 4.257%.

As Market Watch reported, “The U.S. economy expanded in June at the fastest pace in more than two years,” a pair of S&P surveys found, amid growing optimism among business leaders. The S&P flash U.S. services index of purchasing managers climbed to a 26-month high of 55.1 in June from 54.8 in the prior month. Numbers above 50 signal growth. The flash U.S. manufacturing PMI, meanwhile, rose to a three-month high of 51.7 in June from 51.3 in May. Purchasing managers buy supplies for their companies. They buy more when times are good and less when the economy sours. The surveys are the first indicators of each month to give a sense of how well the U.S. economy is doing. New orders, a sign of future sales, increased modestly in May. Employment levels also rose for the first time in three months. The rate at which companies raise prices, meanwhile, fell to one of the lowest levels in four years, S&P found. S&P chief business economist Chris Williamson said the recent deceleration in business selling prices would help the Federal Reserve to achieve its target of annual 2% inflation. The economy has slowed a bit after a surge in growth in the second half of 2023, but the S&P surveys suggest there’s little sign of trouble. What’s made businesses more optimistic is easing inflation and the likelihood of borrowing costs turning lower later in the year.”

If the economy demonstrates slow and steady economic growth, expectations are for the Federal Reserve to begin cutting interest rates at least once in the second half of 2024. Vanguard’s market analysts think it won’t come until December.  As Barron’s Nicholas Jasinski reports, Federal Reserve Bank of Richmond President Thomas Barkin sees lingering inflationary pressures in the U.S. economy, but said last Thursday that today’s level of interest rates is sufficient to slow price growth. It will take time, however, with the full impact of higher interest rates yet to hit the real economy. As for inflation, Barkin said he is encouraged by signs of slowing price growth, but noted that shelter and services categories have been sticky and could be slow to return to 2%. He said that he is a “Fed optimist.” Further, “job growth and inflation have come down…and consumer spending seems to be slowly settling down,” Barkin said. “So [higher rates] are working, but more slowly than expected.”

Supporting that opinion is last week’s retail sales numbers, which again provided more evidence that consumer activity is topping out. May’s meager growth of just 0.1% missed expectations along with a downward revision of April’s number to -0.2%. That marks the 3rd month in the past eight where retail sales have been negative and brings year-to-date sales growth to 2.3%, well below the 3-4% clip we saw in the 2nd half of last year.

On the jobs front…The number of Americans who applied for unemployment benefits last week fell slightly, but new jobless claims stayed near a 10-month high, which may be related to the end of the school year. New claims declined to 238,000 from 243,000 in the prior week, the government said last Thursday. The number of claims two weeks ago was the highest since August 2023. New jobless claims fell in 38 of the 53 states and territories that report these figures to the federal government.

The housing market? Despite cooling inflation, homes across the U.S. in April sold at prices averaging 6% higher than a year before. This indicates demand for homes is still strong, while the supply of inventory underwhelms. While this market could favor those who are looking to sell their homes and move to a less expensive area, hopeful first-time homebuyers may be feeling the squeeze. One benefit, opines Francis Eule of Market Watch, “softer demand for residential construction and easing inflation should allow the Fed to start cutting interest rates this year,” according to Jeffrey Roach, chief economist at LPL Financial.”

One final point to consider…(not to depress you) With large chunks of the 2017 tax cuts, which were passed during the Trump administration, expiring at the end of 2025, there’s already a lot at stake for taxes in the upcoming election. The party that controls the White House and Congress will determine what happens next in the tax code. Among other things, five of the seven income-tax rates are poised to revert to higher rates. That includes the top rate of 37%, which would climb to 39.6%.

So, this week, the next big hurdle for markets won’t come until this Friday. The May read on income, spending, and consumer inflation is due and expected to align with the recent CPI data. The CPI shows inflation cooling but at a slow pace, which is unlikely to allow the FOMC to cut rates before November or at the pace markets have priced in. However, if the data aligns with cooling inflation and an FOMC pivot to lower rates, the market rally will likely continue.

Enjoy your summer it seems to be off to a very hot start, may the markets take their cue from the weather.

Mike