by Blaine Dickason
Senior Vice President
Portfolio Management and Trading
Next month will mark the one-year anniversary of the Federal Reserve’s last interest rate increase. For the last year, there has been much handwringing in the media about a pending recession. Our annual investment outlook presented in January, and our quarterly updates since, have gone against these concerns, and instead presented our thesis that the U.S. economy was positioned to stick the (economic) landing, post-rate hikes, and subsequently avoid a recession. Now that we are halfway through 2024, we see solid economic stability across widespread measures of our economy including interest rates, inflation, bond yields and the unemployment rate when compared to the start of this year.
Looking ahead to the second half of the year, we highlight the following investment themes that we are keeping front-of-mind when managing client portfolios:
Inflation tamed but prices are still high: This morning’s report of the Federal Reserve’s preferred inflation gauge showed the lowest month-over-month increase (+0.08%) since the fall of 2020. While this measure continues to track downward to the Fed’s 2% year-over-year target, that does not mean that prices are declining. Price levels remain considerably higher than just three or four years ago. The anchoring effect that consumers exhibit, recalling favorable prices from just a few years ago, is a large part of the continued frustration with inflationary pressures in our economy.
Pandemic excesses normalizing: The spikes in inflation and unemployment from 2020 through 2023 certainly warranted their share of headlines. What is less obvious was the dramatic buildup in consumer savings during that period that is now largely exhausted. Given the U.S. economy is heavily dependent on the consumer, future spending will be much more influenced by current income and use of consumer debt and without the safety cushion of excess savings.
The labor market has weathered the Fed’s action: Since the Federal Reserve concluded their interest rate hikes last year, the most significant change in the labor market has been a normalization of the supply and demand for workers. Notably, the rate at which workers are quitting their jobs (presumably to accept a higher paying one) has returned to pre-pandemic levels, keeping wage pressures in check. As we’ve highlighted earlier this year, the ratio of job openings to available workers continues to trend back to pre-pandemic levels from its recent peak of over 2:1.
The S&P 500 has delivered over a 15% return in the first half of 2024, marking the twelfth best first half of a year since 1950. The stable economic backdrop, continued strength of the U.S. consumer and corporate earnings exceeding expectations from the start of the year, have been the primary factors behind this robust start for the stock market. The AI-earnings phenomenon has been real and driven much of the earnings growth in the technology and communications sectors. The other S&P 500 sectors are also delivering, and are positioned to grow earnings by 8% compared to last year, contributing to the 11% earnings growth projected for 2024. Our oft-repeated phrase, “As go earnings, so goes the market,” is proving itself once again.
Takeaways for the Week
The Federal Reserve’s preferred inflation gauge was reported this morning for the month of May (Core Personal Consumption Expenditure Index). The annual increase of +2.57% was the lowest since March of 2021 and the monthly increase of +0.08% was the lowest since November 2020
Nike, Inc. delivered a disappointing quarterly earnings report last night, leading the stock to its worst one-day selloff since 2001, motivated by fears that the company was losing ground to longtime rival Adidas and recent upstart On Running