Market Update – July 29th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Monday, July 29th, 2024

Financial Markets

Last week was marked by significant economic data releases, including PCE inflation, personal income, spending, and saving figures, as well as the preliminary GDP report for Q2. As of the close on Friday, July 26th, the Dow Jones Industrial Average was up 0.75% for the week, while the Barclays Aggregate Bond Index followed with a 0.28% gain. In contrast, the Nasdaq had its worst day since October 2022 on Wednesday, ultimately ending the week down by 2.08%, due to a large cap technology sell-off. The S&P 500 mirrored the Nasdaq’s trend, falling 0.83% for the week.

Market News

PCE Inflation

The Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred metric of inflation, was released last week for the month of June. June’s annual headline PCE inflation came in at 2.5%, a slight decrease from May’s 2.6%. Annual core PCE inflation remained steady at 2.6%, matching May’s rate. Both annual figures matched market expectations.

On a monthly basis, PCE increased by 0.1%, while core PCE rose by 0.2% in June. This continued moderation in inflation strengthens the argument for the Federal Reserve to begin cutting rates soon, with the market anticipating the first rate cut at September’s FOMC meeting.

Personal Income, Spending, & Saving

While PCE inflation is moderating, economic activity has also been tempering from the post-pandemic boom of stimulus checks and business subsidies, with June’s personal income, spending, and saving data reflecting this trend.

Personal income and disposable income both increased by 0.2% in June, while personal spending rose by 0.3%. This slight increase in spending above income growth pushed the savings rate down to 3.4%. These figures suggest a stable and still-growing US economy, albeit at a slower pace, aligning with the Federal Reserve’s aim for a soft landing.

Q2 GDP Growth

Last week the advance estimate of Q2 real GDP growth surpassed expectations, indicating that the US economy grew by 2.8% year-over-year in the second quarter of 2024. This increase in real GDP primarily reflected a rise in consumer spending, private inventory investment, and nonresidential fixed investment. Imports, which are subtracted in the GDP calculation, also increased.

This data points to a cooling US economy, with economic growth slightly below long-term averages but still maintaining a fair pace. This scenario aligns with the Federal Reserve’s objective of achieving a soft landing—controlling inflation without triggering a recession.

Existing Home Sales

June existing home sales data was released last week, showing a total of 3.89 million homes sold during the month. This figure represents a -5.4% drop in volume from May and a -5.4% drop compared to June of 2023. Despite the slowdown in sales volume, the median sales price of existing homes reached an all-time high of $426,900, marking a 4.1% increase from a year ago. This price increase also signifies the twelfth consecutive month of year-over-year price gains.

Additionally, the inventory of existing homes for sale rose to 4.1 months, indicating a slow but steady buildup of supply in a higher interest rate environment. The combination of higher borrowing costs and elevated home prices continues to weigh on demand, while the increase in inventory suggests supply has been accumulating.

Although the inventory of 4.1 months represents a 32% increase from a year ago, it is still not sufficient to create a buyer’s market, which is typically defined as having over 6 months of inventory.

Source: National Association of Realtors

New Home Sales

In June, the real estate market saw the sale of 617,000 newly built homes, the lowest monthly volume in seven months and a -7.4% drop compared to the same period last year. The median sales price for new homes experienced a modest increase of 2.5% from May, bringing it to $417,300, however, this price point was flat compared to June of 2023.

Also interesting from June’s home sale reports, new build inventory is being priced slightly lower than existing homes, with the median new home sold in June priced -2.2% below the median existing home. Overall, these trends illustrate a cooling real estate market, heavily influenced by higher interest rates, which are making a notable impact on sales volume in new and existing home markets.

Recession Indicators

 Two key indicators on our Recession Indicator Dashboard were recently updated, providing a mixed view of the US economy. The Philadelphia Fed Manufacturing Business Outlook Survey (BOS), which surveys regional manufacturers on various topics to produce Current and Future Activity Indexes, showed positive changes in July. July’s data turned from neutral in June to bullish in July, with 39% of firms reporting increases in general activity this month, 25% reporting decreases in activity, and 29% reporting no change. Also notable from July’s report, the employment index rose to 15.2 in July, its highest reading since October 2022.

In contrast, the Chicago Fed National Activity Index (CFNAI), which measures economic activity and inflation through factors like production, employment, consumption, housing, and inventory metrics, painted a different picture. Readings above 0 indicate strong activity, while those below 0 suggest weak activity. The CFNAI turned from bullish to neutral in this month’s report, falling from 0.23 in May to 0.05 in June. Within the CFNAI, production remained positive for the month, but sales, orders, inventories, employment, housing and consumption were negative.

Overall, recession indicators appear mixed, with some suggesting a stable and growing economic environment, while others indicate neutrality or bearishness ahead.

Summary

It was a busy week ahead of this week’s Fed meeting, with PCE inflation slightly decreasing to 2.5%, while core PCE remained steady at 2.6%. Personal income and spending saw modest increases, with the savings rate dipping to 3.4%, indicating slower economic growth. Q2 GDP growth exceeded expectations at 2.8%, driven by consumer spending and investment. On the other hand, the housing market showed signs of cooling, with existing home sales volumes down -5.4% and new home sales volumes down -7.4% year-over-year, despite higher prices. Recession indicators varied, with positive signs from the Philadelphia Fed Business Outlook Survey but neutral signals from the Chicago Fed National Activity Index, reflecting a mixed outlook.

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.