MAY 2024 MARKET INSIGHTS

April was a busy month in the capital markets, the economy, and the political world. For the month of April, the S&P 500 returned -4.1%^[1]. When we look at investment styles, the Russell 1000 Growth returned -4.2% and the Russell 1000 Value returned -4.3%, so style focus did not provide a path to better returns during the month^[1].

As it pertains to fixed income, the Bloomberg Aggregate Bond Index returned -2.5%, and the Bloomberg 1–3-year Government/Credit Index returned -0.3%^[1]. In fixed income, investing in a shorter-dated strategy provided a modest measure of protection. The 10-year Treasury ended March at 4.20% and ended the month of April at 4.68% while the 2-year Treasury increased by 36 basis points during the month to a yield of 4.98%^[1].

After a robust start to the year for stocks, most investors had all eyes on the Fed to try and understand when the Fed would start cutting the Fed Funds Rate. Given that inflation has remained stubborn, expected rate cuts in March gave way to June and now there are questions if the Fed will be able to reduce rates by December. Let us spend a moment looking at some of the data to set a framework for what is facing the Fed. The most recent GDP release showed that the U.S. Economy grew by 1.6% for the first quarter of 2024, and this was down from the growth rate of 3.4% in the fourth quarter of 2023^[1]. If growth is slowing that should provide cover for the Fed to start cutting rates. Not so fast!

Inflation continues to remain fairly stubborn and the headline Consumer Price Index (CPI) rate, which had fallen from 3.4% in December to 2.1% in January, accelerated to 3.5% by the end of March^[1]. As many know, the Fed’s preferred inflation gauge is the Personal Consumption Expenditures (PCE) Index which is also increasing and stood at 2.7% at the end of March^[1]. So, on one hand, inflation has declined but it is remaining comfortably above 2.0%. Unemployment has moved around a tenth of a percent here and there, but the latest release illustrated that the unemployment rate is 3.8% and underemployment stands at 7.3%^[1]. Job growth seems to be slowing and average hours worked has fallen below 34 hours per week. This is starting to show some fissures in the employment market, but it is not being manifested in the headline employment statistics. I read research earlier this week that stated the technology sector is seeing job creation slow and the lower-paying sectors in the economy are the areas where job growth is occurring.

I wanted to take a look at some components of inflation, most notably oil and a broad commodity index. Crude oil ended 2023 at $71.65 per barrel and ended April at $81.93 per barrel, representing an increase of 13.9%^[1]. The S&P GSCI Index, recognized as a leading measure of price movements and inflation, grew by 9.4% this year^[1]. As we take a step back, the stated inflation rates are showing annual inflation rates of 2.7% to 3.5%, and oil and broad commodity prices are increasing by much higher rates. These higher commodity, food, and energy prices are crimping enthusiasm for the economy, and it is the level of these various inflation measures that are causing the Fed to pause before being able to start cutting interest rates.

The big question for the markets and the economy is where do we go from here? The most negative outcome would be 1970’s style stagflation where we have a general malaise in the economy while we have entrenched inflation. In the 1970’s, soaring energy costs was the cause of stagflation. We have increased energy costs, but also soaring property costs, and other price increases that are causing the concern that inflation is becoming entrenched. At the same time, the signs of weakness that we are seeing in the employment market are causing the concern of a stagnant economy. I do not think that stagflation is the most likely outcome for the economy, but it does not have a probability of zero either.

The other significant area of focus is the political arena. Our Presidential election is looming while former President Trump is in the middle of a criminal trial that many see as a thinly veiled political attack. The border and the economy are becoming more primary issues for voters and Trump scores much higher than President Biden. It is interesting to see that the Republican Party has not publicly discussed a backup candidate if Trump is convicted. I love to think about the multi-dimensional chess of these types of events, and I keep coming back to a general calculus by the Republican Party that looks with indifference to the outcome of this trial. I think they might be thinking that if Trump is convicted but still gets elected President, he then pardons himself. Interesting mental machinations, but I would fear that an elected and self-pardoned Trump would be focused on the border and the economy on the one hand, but would be strongly vengeance-focused on the other hand. Stay tuned, this election cycle is going to get more interesting.

We need to keep a close eye on the college protests as they are spreading across the country and also seem to be less spontaneous and more professionally organized. These protests are furthering the political rancor and divisions in the U.S. and are worrisome from a social perspective. We need both sides to stop finding new and inventive ways of dividing our population and start finding the common threads that could evolve to be the ties that bind.

Until next month.