Market Update – July 1st, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Monday, July 1st, 2024

Financial Markets

The S&P 500 notched a new, but short-lived, intraday all-time high last week, as PCE inflation data came in as expected on Friday morning. By the end of the week on June 28th, the Nasdaq Composite rose by +0.24%, while the S&P 500 and Dow Jones Industrial Average both fell by -0.08%. The Barclays Aggregate Bond Index also declined, dropping -0.71% for the week.

As we close out the first half of 2024, equities showed strong performance, driven by advancements in AI and technology, a stronger-than-expected US economy, and disinflation. Year-to-date, the Nasdaq Composite rallied +18.13%, followed by the S&P 500, which rose +14.48%. The Dow Jones Industrial Average lagged, up +3.79% year-to-date. Bonds did not perform as well, with the Barclays Aggregate Bond Index down -2.2% in the first half of 2024.

Source: Zacks

Market News

PCE Inflation

On Friday morning, May PCE inflation data was released, matching expectations and echoing the light CPI print from earlier in June. Personal Consumption Expenditure (PCE) inflation came in at 2.6%, with core PCE also at 2.6%, marking the lowest level since March 2021. On a monthly basis, PCE remained flat while core PCE rose slightly by 0.1%. This is good news for the Federal Reserve, as their preferred measure of inflation creeps closer to their 2% goal, however there is still more progress to be made to achieve this goal.

Personal Income, Spending, & Saving

Along with the PCE report, the US Bureau of Economic Analysis also released important data on consumers’ income, spending, and saving trends last week. Personal income rose 0.5% in May, surpassing the 0.4% estimate. Disposable personal income, which more accurately reflects consumers’ take-home pay, also increased by 0.5% in May. Consumer spending, however, or personal outlays, grew only 0.2%, falling short of the 0.3% forecast.

As a result of higher income and a smaller increase in spending, the personal savings rate rose to 3.9%. This month’s weaker spending data coincides with May’s retail sales, where consumers also demonstrated a pullback in spending habits, which could be a signal of weakness in household finances.

Consumer Confidence Falls

The Conference Board’s Consumer Confidence Index fell slightly in June due to rising concerns about future economic conditions. On one hand, the Present Situation Index, based on consumers’ assessment of current business and labor market conditions, increased in June. However, on the other hand, the Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, fell. For five consecutive months, the Expectations Index has been below 80, which is the threshold usually signaling a recession.

Consumers’ assessment of their family’s financial situation, both currently and over the next six months, was less positive. Write-in responses revealed that elevated prices, especially for food and groceries, continued to impact consumers’ views of the economy, followed by concerns about the labor market and the US political climate. Consumers are not feeling as well off as they did a year ago, and both they and many economists see legitimate risks ahead.

Stress Test

The Federal Reserve published the results of their annual stress test, which evaluates the capital levels, losses, revenue, and expenses of large banks under a hypothetical recession and financial market shock. This test, implemented after the 2007-2009 financial crisis, aims to ensure the resilience of the financial system through increased regulation and monitoring.

All 31 participating banks tested passed the stress test. However, the Fed noted that banks are in a worse position compared to a year ago for several reasons. Increased credit card balances and higher delinquency rates have led to greater projected credit card losses, indicating mounting consumer debt. Additionally, riskier corporate credit portfolios and loan downgrades have resulted in higher projected corporate losses. Higher expenses and lower fee income have also reduced projected income, limiting the banks’ ability to offset these losses.

Source: Federal Reserve

Skeptics of the stress test express concerns about potential conflicts of interest, suggesting that a national government may not fully disclose weaknesses in its financial system to avoid causing panic or triggering a bank run. Adding to the scrutiny, JPMorgan Chase stated that the Fed overestimated a key measure of its income called other comprehensive income, and that its projected losses should be higher than what the Central Bank projected.

Overall, the key takeaway is that while banks appear to be in fair shape, their condition has deteriorated compared to a year ago, partially attributable to the quantitative tightening the Federal Reserve has implemented.

Economic Indicators

Last week, the Chicago Fed’s National Activity Index (CFNAI) was updated to reflect May’s economic data. The CFNAI, which measures economic activity and inflation through factors like production, employment, consumption, housing, and inventory metrics, showed a rise from -0.26 in April to +0.18 in May.

Of the index’s components, 54 improved from April to May, 29 deteriorated, and 2 remained unchanged. The primary driver behind the increase was production-related indicators, contributing +0.23 in May, up from -0.15 in April. Employment indicators were neutral, while sales, orders, and consumption were slightly negative. As of June 25th, the CFNAI turned from neutral to bullish, marking the only change in our economic indicators since last week.

This leaves five out of eight indicators looking bullish, two bearish, and one neutral, marking a slight increase in our bullish outlook on current economic conditions.

Sources: Federal Reserve, The Conference Board, Synergy Asset Management, LLC

Summary

Despite being more muted last week, stocks posted a positive first half of 2024. In this past week’s economic news, PCE inflation remained flat at 2.6%, personal income rose 0.5% in May, and consumer spending grew 0.2%. Consumer confidence fell slightly, with concerns about future economic conditions. The Federal Reserve’s annual stress test showed all 31 banks passing, but conditions deteriorating compared to a year ago. The Chicago Fed’s National Activity Index turned positive in May, leading our economic indicator dashboard to appear more positive than the previous week’s.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.