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As we enter the third quarter of 2024, the bull market continues. At the beginning of the year, many investors hoped for lower inflation and rate cuts. What did we get instead? Lower inflation and new highs for the S&P 500. History shows us that, once again, the market will perform how it wants to and absorb whatever information seems relevant at that given moment. Factors will always influence the market; the question is whether investors are willing to accept and adapt to the ever-changing environment. In this quarterly perspective, we will look at key economic factors watched by the Fed that could ultimately influence changes in monetary policy, consequently affecting market performance and changes in investment options for our client portfolios.
Inflation
We may enter a new cycle as inflation continues to cool, potentially increasing the probability of a rate cut at the end of this year. Core PCE (Personal Consumption Expenditures), the Fed’s preferred inflation measure, has declined to 2.6% YoY, .2 pp (Percentage points) lower than the annual projection released during their June meeting. The CPI (Consumer Price Index) report also showed a price decline, currently 3% YoY. The largest contributors to the decline were energy, shelter, and auto insurance. On the other hand, PPI (Producer Price Index) increased from 2.4% in May to 2.6% in the June report. Core PPI also rose sharply to 3% YoY in June, previously 2.6%. According to the BLS(Bureau of Labor Statistics), most of the increase in PPI comes from final demand services, but prices for final demand goods decreased by .5%. Investors wonder why the Fed hasn’t implemented a rate cut if inflation is declining. Part of the reason is they need to abide by the dual mandate by keeping prices stable and maintaining low unemployment. As of June 2024, the unemployment rate increased to 4.1%, its highest since November 2021. An increasing unemployment rate could be a sign of a weakening economy, so the Fed must be cautious about when and how much they will reduce rates.
Interest Rates
The Federal Open Market Committee (FOMC) met again to discuss the current economic environment and future monetary policy changes. Although many expected a rate cut in the previous meeting, the Fed decided to keep rates at the current level again (currently 5.25%-5.5%). The Fed chair, Jerome Powell, has repeatedly stated that they will only cut rates once they reasonably believe that Core PCE is approaching a target level of 2%.
Some countries have already started
cutting rates; Canada was one of them, and the ECB (European Central Bank) implemented its first rate cut since 2019. Looking at the interest rate map to the right, we see that most countries have interest rates below 10%. A few countries, such as Venezuela, Turkey, and Argentina, have the highest interest rates, reaching levels well above 30%. US investors must remain persistent and wait until the Fed decides to implement its first cut.
Market Overview
The market has proved resilient despite the ever-changing economic environment. While many thought we were entering a period of slow growth, it was also assumed that high interest rates would affect market performance. As we can see in the chart below,
the S&P
500 and the NASD have taken the lead this year as of 6/30/2024. The S&P has returned 14.48% YTD, and the NASD 18.13%, while the DOW and the Russell lagged. Most recently, the Russell 2000 started trending up. It is said that small caps lead
to a recovery, but it may be premature to
declare any changes in trends. Equities have not been the only asset class delivering returns. In the Fixed Income sector we have seen more opportunities investors can benefit from. As credit spreads widen, it makes sense to consider other bond sectors. We have witnessed attractive returns in the corporate and mortgage-backed securities sector without entering the junk bond space.
Elections
As we approach election day, many investors start to wonder whether elections impact the market or not. As mentioned in the previous market perspective, an election year could add more noise to the market and increase volatility, but this doesn’t mean the
market will automatically head
for a downturn. I want to point out that it is not necessarily about who is running for president or who has control over the house; it is about the potential policy changes that will occur if either party takes office. This slide by Dimensional shows the S&P 500 annualized returns during each period these presidents were in office. A great example would be highlighting the differences in political views by comparing former presidents Reagan and Obama. Reagan was seen as business-friendly and implemented tax cuts during his term. Obama, on the other hand, was seen as a socialist as he advocated for healthcare for all; despite their different beliefs, the annualized market returns are about the same. Others could argue about those who had negative returns during their presidential term; let’s take George W Bush, for example; he began office during the Dot com bubble and ended with the financial crisis. It is important to consider other events that could affect market returns and not focus on the president or party itself.
CWM Portfolios
At Corinthian Wealth Management, our top priority is our clients’ needs. When reviewing and assessing potential changes, we look at the current economic environment and market trends, but most of all, we trade for your needs. We are currently “in an environment offering reasons for caution, but also some optimism,” and by having a well-diversified portfolio, we can achieve two things: we participate when the market is up and mitigate losses when the market goes down. A few shifts we are implementing are changes in our fixed income allocation, as higher-yielding investments offer the potential for higher returns while maintaining low risk. We are also rebalancing certain positions to reduce the tilt over certain asset classes. If there is a potential capital gain implication, we will contact you before executing any trades.
As always, we remind our clients that discipline rewards investors. If you anticipate any life-changing events or are currently experiencing circumstances that require readjusting your portfolio, please contact your main advisor or call us at (408) 995-0915.
Advisory services offered through Corinthian Wealth Management, Inc. a Registered Investment Advisor.
Other disclosure:
“In no way is Corinthian Wealth Management or Dimensional endorsing a political party, this is for educational purposes only. “
Resources
“Building Confidence,” Perspectives by Goldman Sachs. April 10th,2024.
Market Monitor week ending July 5th, 2024 by Goldman Sachs.
Trading Economics:
CPI - https://tradingeconomics.com/united-states/inflation-cpi
Federal Funds Rate - https://tradingeconomics.com/united-states/interest-rate
Unemployment Rate - https://tradingeconomics.com/united-states/unemployment-rate
PPI - https://tradingeconomics.com/united-states/producer-prices-change
Interest Rates Map - https://tradingeconomics.com/country-list/interest-rate
“Helping Clients Understand Annual Performance” webcast by Dimensional 07/11/2024
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