In May, the stock market bounced back from a challenging April, closing the month on a high note. This significantly improved from the previous month, when the market faced several challenges. Investors closely watched job growth, GDP figures, corporate earnings, and inflation data to gauge when the Federal Reserve might reduce interest rates. All major benchmark indexes posted significant gains. The tech-heavy Nasdaq (1), which is dominated by cash-flush tech corporations that have been less impacted by the higher rates, led the way, followed by the Russell 2000 (1), the S&P 500 (1), and the Dow (1). Consumer confidence was stronger than expected, surpassing April’s levels. However, the labor market showed signs of slowing, and wages experienced a slight decline since April.
Inflation in April (reported in May) showed signs of stability, with the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) Price Index rising by 0.3%. The CPI, which increased by 3.4% over the past 12 months, was slightly lower than the previous year’s 3.5%. This CNBC article offers an interesting chart that breaks down YOY inflation for specific core categories. The PCE price index remained steady at 2.7% for the year ending in April. Economic growth, however, decelerated, with GDP rising by 1.3% in the first quarter compared to 3.4% in the fourth quarter, marking the slowest growth rate since mid-2022.
In May, Rick Rieder from BlackRock posited that the Federal Reserve’s main strategy of raising interest rates to fight inflation might actually increase inflation, which contradicts traditional Fed policy. His point is higher net-worth consumers, with assets on deposit at higher interest rates, have more disposable income to spend on goods and services, creating an inflationary effect. To appreciate the recency and magnitude of higher interest income of money markets balances, consider the chart from the Federal Reserves below.
The Fed began its rate hiking regime in mid-2022, taking
money market yields from less than .5% to over 5% in a little over one year. On
a $100,000 money market balance interest yield went from ~$500 to over $5,000.
Rieder estimates this generates an additional income of $1.2 trillion a year,
which high-end consumers can spend on goods and services, thus supporting
demand and higher prices.
This dynamic has exacerbated economic inequality by creating
a divide between the “haves” and the “have-nots.” Those
with more significant net worth benefit from increased interest income from
investments. However, lower- and middle-income earners, who typically carry
more debt, such as student loans, auto loans, and credit card balances, face higher
interest expenses as heavier financial burdens. The increased cost of borrowing
means that a larger portion of their income goes toward interest payments,
reducing their disposable income and financial stability. This dynamic widens
the economic gap and allows the wealthy to accumulate wealth while those with
less struggle to keep up with rising expenses. Rieder’s counterintuitive net takeaway
is the Fed lowering rates could be disinflationary and reduce financial stress
on lower-income segments.
On the labor market front, April experienced a notable
decline in new job additions, fostering cautious optimism that the Fed might be
more inclined to lower interest rates. The labor
market added ~250 jobs MoM over the past year, with hiring remaining strong
in education and healthcare and manufacturing losing its job share. For the
week ending May 25, there were 219,000 new unemployment insurance claims, an
increase of 3,000 from the previous week’s revised level. Wage growth also
slowed, rising by 3.9% over the past year, down from 4.1% for the year ending
in March. New weekly unemployment claims decreased from a year ago, while total
claims paid increased.
Corporate profits experienced a decline for the first time
in a year, falling by 0.6%. (2) However, the first-quarter earnings season
brought some positive news. About halfway through, S&P 500 companies
generally exceeded expectations, with 77% of those reporting outperforming
earnings per share estimates. This performance, especially in sectors such as
communication services, financials, industrials, and information technology,
instilled confidence. However, rate-sensitive areas of the economy, such as real
estate and banks, have remained stressed. High mortgage rates influenced the
housing market, leading to a decline in sales of both existing and new homes in
April. Selling prices for existing homes continued to rise while new home
prices declined.
In June, all eyes will be on the Federal Open Market
Committee’s meeting, with investors keen to see how the Fed will respond to the
latest data on job growth and inflation.
Nearing
the halfway mark in 2024, we continue to prioritize a long-term, strategic
focus, aligning diversified portfolios with clients’ financial plans and risk
tolerance. The return to normalcy from pandemic extremes continues, but a new
normal of higher trend inflation in the 3% range and concurrent higher interest
rates appears to be emerging. The long-anticipated recession has yet to
materialize. We are staying fully invested, adjusting stock exposure based on
client profiles, and leaning into the sectors that should benefit from a strong
earnings outlook and an improving economy. On the fixed income side, we have gradually
transitioned from being overweight short-term, liquid positions, like money
markets and treasury bills, into slighting longer-duration bonds that offer
higher income while balancing credit quality and maintaining diversification.
As summer kicks off, it’s the perfect time to schedule a
review of your financial plan. With the hustle and bustle of the season, ensuring
your finances are on track can provide peace of mind and set you up for a
successful year. We are available to answer any questions you may have or to schedule a meeting
at your convenience. Don’t hesitate to reach out—we’re committed to supporting
you every step of the way.
Thank you for your continued trust,
1. The NASDAQ, Russell 2000, S&P 500, and Dow (DJIA) are unmanaged groups of securities considered to be representative of the stock market in general.
2. https://www.broadridgeadvisor.com/fmaweb/Newsletters/MarketSummaries.aspx?iplf=n
This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results.
