Economic Update 7-15-2024

• Economic data for the week included consumer price inflation coming in slower than expected, continuing a path of deceleration, while producer price inflation ticked up a bit from recent trend. Consumer sentiment continued to be negatively affected by higher price levels of the past several years.
• Global equities gained ground along with the lower U.S. inflation report and dovish central bank commentary. Bonds also fared well, along with falling yields, especially in foreign debt markets as the dollar weakened. Commodities generally lost ground for the week.

U.S. stocks saw gains last week, with small caps up sharply relative to large caps, reversing weakness from much of this year. By sector, ‘value’ outperformed ‘growth,’ with utilities, materials, and health care seeing the strongest results of around 3% or better, while communications fell by over -3% (led downward by Meta and Netflix) and minimal gains in technology. Real estate gained over 4% along with the fall in yields.

Fed Chair Powell’s semiannual testimony to Congress, per usual, was designed as a recap of current monetary policy, so naturally featured a discussion of inflation, but focused increasingly on a slowing job market, which caused financial markets to respond positively mid-week. He noted that the two sides of the Fed’s dual mandate were now “much more in balance,” although they will still need to see additional cooler inflation readings to have the “greater confidence” needed to begin policy easing. This was still taken by markets as a sign inflation has begun to fade as a primary concern, reinforced by the slower CPI numbers on Thursday, although the market response was mixed at the time, coinciding with perhaps some skepticism about the underlying core inflation/shelter trend and potential skittishness over the start of earnings season.

Speaking of which, earnings reports for the 2nd quarter began Friday, with several mega-cap banks starting things off, with JPMorgan and Wells Fargo showing somewhat mixed results. Per FactSet, earnings growth expectations for Q2 are hovering around 9% on a year-over-year basis for the S&P 500—exceeding the 6% of Q1 and potentially the best quarter in several years. Expected leadership by sector continues to include communications, technology, and health care (with earnings growth expected to be in the 16-18% range), with materials expected to lag with an earnings decline of -12%, and industrials also expected to experience a decline. Index revenue growth is expected to be just under 5%, with still-robust profit margins expected to be the catalyst for the stronger earnings results. Interestingly, internationally-sourced revenue has picked up as a percentage of the total as of late.

Foreign stocks outperformed U.S., with Japan and emerging markets slightly outperforming Europe, all helped by a weaker U.S. dollar and further deceleration of U.S. inflation. Stronger economic growth in the U.K. may have also helped sentiment a bit, along with fading fallout from recent elections there and in France. In Japan, it appeared authorities have continued to intervene to support the weak yen. In emerging markets, Chinese stocks gained on the heels of stronger export data, while Mexican stocks also rebounded after recent post-election weakness, also helped by a weaker dollar and hopes for Fed cuts. The Chinese Third Plenum, held every five years, is coming up this week, with an expected focus on key economic priorities and potential reforms.

Bonds fared positively, as yields fell by 10-15 basis points across the U.S. Treasury yield curve, along with Thursday’s improvement in CPI inflation. This has presumably raised the solidified the odds of a Federal Reserve rate cut in September. Bond groups performed similarly, with senior floating rate loans faring slightly less positively than others, as would be expected in a falling rate week. Foreign bonds in both developed and emerging markets benefitted positively from the U.S. dollar falling by nearly a percent last week.

Commodities lost ground last week, with gains in precious metals offset by declines in energy, industrial metals, and agriculture. Crude oil prices moved down a few percent to just over $82/barrel.

Period ending 7/12/2024	1 Week %	YTD %
DJIA	1.61	7.22
S&P 500	0.89	18.61
NASDAQ	0.25	23.04
Russell 2000	6.01	6.76
MSCI-EAFE	2.29	10.08
MSCI-EM	1.82	11.55
Bloomberg U.S. Aggregate	0.82	0.82

 

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2023	5.40	4.23	3.84	3.88	4.03
7/5/2024	5.46	4.60	4.22	4.28	4.47
7/12/2024	5.43	4.45	4.10	4.18	4.39

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.