NEWSLETTER VOL 2 | JUNE 2024

As we approach the end of the first half of 2024, the US markets and economy are on solid ground. A robust labor market, easing inflation, and continued income growth are fueling consumer spending, which in turn supports corporate earnings and profit margins. Despite the Federal Reserve keeping interest rates at restrictive levels, investors have much to celebrate. After a brief dip in April, the old saying "Sell in May and Go Away" has been disproven this year, with the S&P 500 Index rallying 8% since April, bringing year-to-date gains to 14%.

Typically, controlling high inflation involves slowing economic activity via higher interest rates, which often leads to a recession. Currently, there are few signs that high interest rates have disrupted the economy but have been effective in subduing inflation. The labor market is strong; the unemployment rate stands at 4%. The growth in non-farm payrolls in May exceeded expectations, and layoff announcements are still scarce, consistent with the small number of initial jobless claims. While job openings have decreased from post-COVID highs, there are still more positions available than there are people to fill them.

A strong job market translates to a strong consumer base. Consumer spending has remained robust, though debt has risen for some economic segments, leading to an increase in delinquencies. However, household debt service payments compared to disposable income remain well below historical averages.

Inflation remains the top concern for consumers, with prices up 18.1% from pre-COVID levels. Food and restaurant costs have increased by about 24%, rents by 22.6%, and health insurance by 21%. However, private wages have also risen by 21%, with lower-paid employees seeing a 24.2% increase. 

Fortunately, inflation is trending lower again after a brief rise earlier in the year. The Consumer Price Index for May came in below expectations at 3.3% overall and 3.4% for the core rate excluding food and energy prices. Excluding the lagged impact from shelter costs, core CPI rose just 1.9%. The Fed's preferred Core PCE Price Index is up 2.8%, close to their 2.0% target.

It appears the Fed's next move will be to cut rates. However, the underlying economic strength allows them to maintain higher rates for now as a safeguard against unexpected inflation spikes. Market-based indicators of Fed Funds Rate expectations have aligned with our view, anticipating a rate cut in either September or November. We wouldn't be surprised if the Fed waited until early next year. They have the flexibility to be patient and can cut rates if economic growth begins to falter, while also getting more-and-more of a greenlight from inflation data. This means that a major policy mistake is unlikely in our opinion, because there are good reasons for either course of action.

Currently, with strong recent market gains and little concern for economic data, investor sentiment may be overly positive, which could lead to volatility. Nonetheless, our overall outlook remains constructive for the stock market and corporate credit. In our diversified portfolios, we continue to see global opportunities, particularly in Italy and Japan, and have increased allocations to semiconductors and short-duration and floating-rate credit. In our high-conviction equity portfolios, we maintain exposure to the "picks and shovels" segments of the AI and high-tech industries. As always, we are vigilantly monitoring for emerging risks.