JUNE 2024 MARKET INSIGHTS

This year, KoCAA has switched our mutual fund benchmarks to Bloomberg’s suite of market indices. Going forward, we will quote the Bloomberg index returns in Market Insights and CIO Corner. For the month of May, the Bloomberg 500 returned 4.8%¹. When we look at styles, the Bloomberg Large Cap Growth returned 5.7% as compared to the Bloomberg Large Cap Value index return of 2.9%¹. Continued strength in artificial intelligence stocks benefitted the growth style during the month.

The Bloomberg Aggregate Bond Index returned 1.7% during May1. The 10-year Treasury ended April with a yield of 4.68%, and this rate declined to 4.5% by the end of May1. The decline in interest rates helped drive the total return for the benchmark. Credit spreads narrowed slightly during the month, and this also positively impacted bond returns.

The Fed remains focused on data in determining when they may be able to begin trimming the Federal Funds Rate. From our perspective, inflation has certainly come down from the peak, however, it is still elevated. One key relationship we have been following is the difference between wages and inflation. Currently, wages are growing at 3.9% and the last reading of the CPI stood at 3.4%1. The Fed focuses more acutely on the Personal Consumption Expenditures (PCE) Index and the last reading of PCE saw a year-over-year increase of 2.7%¹. With wages continuing to grow faster than inflation, this relationship is further fueling inflationary pressures in the economy.

The most recent release of the ISM Manufacturing Index showed a contraction to 48.7 from 49.21. Any reading below 50 indicates a contraction in manufacturing activity and this reading indicates that the decline in manufacturing is increasing. The index of Purchasing Managers Orders slid the most since 2022 and is another key data point highlighting the slowing in the overall economy. Within the ISM data release is their index of prices paid, and this index fell to 571. While a reading over 50 indicates an increase in the index, this would suggest that prices paid are rising at a decelerating rate, yet another indication of declining inflation pressures.

General economic theory holds that the impact of the Federal Reserve’s monetary policy is often felt 18 months after the onset of an interest rate hiking cycle. While a bit delayed, the impact of central bank interest rate hikes around the globe appears to have the desired effect of muting economic activity. The Fed has been trying to carefully thread a needle where they are able to bring down inflation without materially increasing unemployment. As we see the slowdown in manufacturing, we will be watching corporate profits and spending. If companies begin to report a slowdown in profitability with a corresponding lessening of capital expenditures, it is not difficult to imagine the economy slowing to a point where inflation falls. The question is whether this activity will cause the economy to slip into a recession.

It would be impossible to write a market commentary without a brief discussion of the Trump court case that was decided last week. This case witnessed the historic conviction of Donald Trump and may have forever changed politics in the U.S. I am not informed enough on the legal nuances of the case, but many people from both conservative and liberal media have cited numerous reversible errors that will be brought up under appeal. This will all play out in the coming months, but perhaps the plot will thicken if the judge orders Trump to jail. I suppose this will cause a very quick appeal as the Presidential election takes place in a few short months.

As the Trump sentencing and inevitable appeal work their way through the legal system, we will still be left with a Presidential election that is expected to be extremely close and likely coming down to a few battleground states to decide the next President. The views of the independent voters will be extremely important because they supported Trump in 2016 and shifted to Biden in 2020. If the border, economy, and inflation are the key drivers of the election, one would think Trump has a better chance of winning. If Trump’s character and legal woes are the key drivers in the election, this may sway more voters to side with Biden.

Personally, I am intrigued to watch the Democratic National Convention this year. If the consensus view is that President Biden is operating at a diminished mental capacity, will there be a contested convention whereby a different candidate is selected? Michelle Obama has made it known that she will not run, but does Oprah Winfrey get called from the bullpen? Will the Democrats coalesce around the golden boy from the Golden State? I have been considering this because Biden’s campaign for the 2020 election and his time as President have been largely scripted. Will the Democrats allow Biden on a stage where a debate, even with friendly media, could expose his current mental capacity?

Thus far, market activity has been centered on economic data releases and how these releases will or will not influence the Fed’s interest rate decisions. If the Presidential and national elections become even more contentious, there is a possibility that the political arena will spill over into the capital markets. I suspect that the Presidential election and the composition of Congress will become a more pronounced factor as we move through the summer and closer to election day. There will be more to come on this in the coming months. Stay tuned!