NEWSLETTER VOL 3 | JULY 2024
As we progress through the summer, the economic and financial landscape keeps changing, yet the focus stays the same—when will the Fed lower interest rates? Federal Reserve Chair Jerome Powell’s recent congressional testimony helped answer that question, indicating the increased likelihood of cuts this Fall amid signs of slowing inflation and softer economic growth. Investors read this as a return of the "Fed put" which provided impetus to propel the major stock indices further into record territory. Year-to-date, the S&P 500 Index is up nearly 18%, with the tech-heavy Nasdaq 100 up almost 21%!
Economic Landscape
The broader economy is showing signs of slowing. The labor market remains solid but is exhibiting signs of softening. The unemployment rate rose to 4.1% in June. There are caveats that make that rise seem more ominous than it is, but non-farm payrolls have softened in recent months, as well. Though mass layoffs have not significantly increased, initial jobless claims have edged higher, and people are staying unemployed for longer.
The ISM Services Index—which represents a major segment of the U.S. economy—fell short of expectations after trending lower in recent months, adding to the list of weaker than expected economic data points. The Citi Economic Surprise Index at -46.8 is raising concerns about growth prospects.
However, the overall picture is mixed. The Coincidental Economic Index still has a positive trend, and LEI (Leading Economic Index) has turned up. The banking system is in decent shape and there are no clear excesses in household debt. In many ways, this is like the slowdown at the end of the Fed’s last tightening cycle in 2019. Economic growth began to faulter but quickly found its footing as the Fed eased off the brakes in the absence of any banking crisis or credit crunch.
The Fed has a green light to cut rates with the latest read on the Core CPI and PCE, excluding shelter, coming in at just 1.9% and 2%, respectively, in June. And multifamily overbuilding is beginning to provide some relief in supply—which should continue to put downward pressure on rent inflation part of the price indexes, as well.
The Fed Funds futures market pushed the odds for a rate cut in September up sharply after Powell’s dovish comments and the softer-than-expected CPI report this week.
Investment Strategy
The recent market dynamics are reminiscent of a melt-up in stocks prices. While that is not our forecast, per se, we do see strong underlying fundamentals in the economy supporting earnings growth. And it appears that there is waning risk of the Fed needlessly keeping rates too high. We anticipate more volatility like we have seen in recent trading days, primarily because of the persistent bullish sentiment—which can be a contrarian negative indicator in the short-term. And the market is due for some backfilling after the sharp rally driven by the "Magnificent 7" stocks—including the likes of Nvidia, Microsoft, Apple, etc. But overall market breadth is improving, and forward earnings are up across the board, indicating broader market resilience.
Our investment strategy for our proactive diversified portfolios maintains a high allocation to domestic equities—with and emphasis on the tech-space—while selectively overweighting certain international areas, such as currency-hedged Japan, small-cap India, Latin America, and Italy. These selections are based on relatively positive growth prospects and attractive valuations, providing a diversified exposure in a predominantly home-biased portfolio. We also have significant allocations in corporates and floating rate loans that mitigate interest rate risk while benefiting from sound financial conditions.
As we navigate through the remainder of the year, our strategic positioning remains focused on capturing opportunities while mitigating risks. The market landscape, characterized by cautious optimism and strategic insight, will continue to guide our investment decisions in the months ahead.
