NEWSLETTER VOL 1 | MAY 2024

NEWSLETTER  VOL 1 | MAY 2024

After reaching all-time highs towards the end of March, the S&P 500 gave back some ground to start April. The selloff appears to have bottomed on April 19th, but despite a strong comeback the S&P 500 is still below March levels. Markets have adjusted from what we believed to have been unrealistic expectations for the pace of cuts from the Fed at the start of the year to a far more balanced view. The modest volatility that we saw in moving from expectations for up to five rate cuts all the way down to a little as one cut is a testament to underlying economic strength. Those expectations were moved by a string of hotter-than-expected inflation reports that demonstrated we are not out of the woods yet. However, we remain confident in the longer-term trend of cooling inflation.

The Federal Reserve maintained its interest rates at 5.25%-5.50% in its last meeting. Fed Chair Powell’s remarks indicated that the next rate movement would likely be a reduction but remained coy regarding the timing. Chair Powell said any cut is dependent on more conclusive evidence that inflation is moving consistently towards the 2% target. The market is pricing in about a 66% chance that the Fed holds pat until September; we think the odds are even higher. We are expecting to see the first cut in September, in line with the market, but we think there is a reasonable chance we do not see a cut in all of 2024. Our outlook is not particularly contingent on the exact timing; it would take a strong uptick in inflation paired with weakness in credit or labor markets for us to shed our indifference.

It was a depressing month on the geopolitical front and the markets saw some volatility in response. The conflict between Israel and Hamas raged on and nearly reached a tipping point when a series of escalations between Israel and Iran, including a direct attack on Israeli soil, threatened to push the war in to a regional conflict. Ceasefire talks ended between Israel and Hamas with no deal and Israel has moved forward with operations in Rafah, despite US opposition. After much political jockeying in the House, the US was able to deliver a much-needed aid package to Ukraine, but not before the lack of munitions led to substantial setbacks against invading Russian forces. The humanitarian suffering brought on by these conflicts is beyond tragic; but, while far from the most important matter, economically, we do not see the potential for any meaningful changes to our outlook in face of these setbacks or even some further deterioration.

On a positive note, earnings reports have been supportive of equity prices as companies have shown the ability to grow topline revenue, profitability, and even profit margins in the face of high rates and elevated labor costs. Labor remains very strong with near record unemployment, and, like companies, the consumer has managed higher interest rates well, leaving room for further spending. Overall, we think the economy and stock market still have room to run.