MARKET INSIGHTS AUGUST 2024
For July, the Bloomberg 1000 Total Return Index returned 1.41%[1]. The Bloomberg 1000 Growth Index returned -0.11% and the Bloomberg 1000 Value Index returned 5.12%[1]. Several earnings disappointments in the tech sector and a concern of slowing labor markets along with a slower economy saw a sharp rotation to value stock leadership.
The 10-year Treasury note started July with a yield of 4.40% and ended the month at 4.03%[1]. In general, we saw economic news pointing towards a slower economy and a view that a 2024 Fed Funds rate cut was back on the table. Annual GDP is still showing 3.1% growth[1]. That said, the last inflation readings showed CPI at 3.0% and 3.3% ex food and energy[1]. The Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, is growing at 2.6% year over year[1]. It is the slowing of these inflation measures that has strategists focusing on a growing likelihood of a rate cut this year.
Unemployment has increased by 0.1% each month over the last four months and stands at 4.1%[1]. At the same time, Nonfarm Payroll figures are showing new job growth at just above 200,000, so we are starting to see more slack in the economy[1]. Average hourly earnings are still growing at 3.9%, though this has been flat for the last three months and down 0.2% since March[1]. While wages are growing faster than inflation, they are starting to moderate. When we look at economic activity, Industrial Production is showing an annual growth rate of 1.6%, while Durable Goods Orders declined by 6.6% in the last reading and over 11.1% for the trailing 12-months[1]. The ISM Manufacturing index stands at 48.5 and any reading below 50 indicates a contracting manufacturing sector[1]. Finally, the Index of Leading Indicators was -4.8% over the last 12 months. This index is getting less negative, however, the index has historically had strong predictive ability for economic activity over a 6 to 12-month forward view. We continue to believe that the Fed will risk higher unemployment in order to tamp down inflation. That said, given how inflation is rapidly declining, the Fed may have cover to consider a reduction in the Fed Funds rate later this year. We think any rate cut will need to come after strong evidence that inflation has fallen to an acceptable level for the Fed.
On the political front, the Presidential race seemed to be an assumed Trump win over Biden. As Biden has now dropped from the race, there is a real election to occur between Vice President Harris and former President Trump. I, along with many others, have posited that the path to winning the U.S. Presidency is straight through the heart of the independent voters. Roughly speaking, the electorate split represents 30% Republicans, 30% Democrats and 40% Independents. The partisan stalwarts will predictably vote along partisan lines. This means the hearts and minds of the independents will drive the outcome.
In 2016, Hillary Clinton was a flawed candidate who decried the “basket of deplorables”. This quote, among other issues, led Donald Trump to become President. In 2020, suburban voters, minority groups and women saw President Biden as a better alternative and Trump was defeated. Given the obvious decline in Biden’s mental acuity, Trump was polling very well against him, until Biden was pushed out. By many well-regarded polls, and I know that polls are often quite misleading, this Presidential race is now a true race.
We believe the market is trying to understand what the economy may look like under the two Presidential scenarios. The markets were loving the “Trump Trade” because it was widely felt that Trump would defeat Biden, extend tax cuts, slash regulation, raise tariffs on foreign producers, and provide a tailwind for the American economy. A Harris Presidency would likely look to roll back the tax cuts, increase entitlement spending, and ease tariffs on foreign producers. In general, a Harris Presidency would be less friendly to the markets given tax and spending priorities. Perhaps the best outcome would be a divided House and Senate that could cause the type of gridlock that markets love. In this environment, the President and the two houses of Congress would be locked in combat and the legislative gridlock would do little to upset the status quo.
Ultimately, I think the chief product of this election cycle is going to be volatility. People will extrapolate poll numbers, swing states and political rhetoric. By extension, a winner will be forecasted, and their attendant legislative proclivities will then also be forecasted into the future. You get the idea. I come back to the notion of the two types of risk: price volatility and the risk of permanent loss. Price volatility feels really bad, though experiencing true realized permanent losses not only feels worse, but actually is worse. The increased volatility will call for patient investing to understand the longer-term impacts of policy versus short-term price fluctuations that many investors will attempt to extrapolate into the future.
Finally, this month, the global stage is in serious turmoil. The war in Ukraine rages on with little hope of a near-term cease fire. Israel’s attack on a Hamas leader makes the Middle East potentially more explosive. I do believe that the U.S. assertion that it will defend Israel may keep the Iranians and their proxies from staging a full-on assault on Israel. Interest rates have rallied as has gold and oil. These are predictable short-term moves after the action taken by Israel. This region will be difficult up to, and through, the election. The wall of worry remains intact.
Until next month.
