Full Steam Ahead

By JSF Financial on Jun 28 in Market Update

Quick Take: Stocks set new highs during May as signs of a slowing economy led bond traders to pull forward expectations of rate cuts.^[1] Treasuries had their best month in 2024.^[2]

Stock market performance broke more records in May, as the S&P 500 gained 4.8% while the tech-heavy Nasdaq added 6.9%.^[3] Both indexes posted their best May performance since 2003. ^[4] It was the sixth positive month in seven for US equities.^[5]

Earlier in the year, the bulls had cheered on the fact that the rally was broadening beyond tech stocks. In May, market breadth was worse, as four mega tech stocks added more market value than the rest of the S&P 500. Half of the gains from the four mega tech stocks Nvidia, Microsoft, Apple, and Alphabet actually came from Nvidia.^[6] AI chipmaker Nvidia reported blowout earnings and has been a major driver of stock market momentum, responsible for about one-fourth of total S&P 500 gains.^[7]

Inflation readings came in around expectation as the core personal consumption expenditures index posted its smallest increase for the year while consumer spending unexpectedly dropped.^[8] These signs of slowing growth led traders to pull forward rate cut expectations, and Treasury prices rose to cap their best month in 2024. ^[9], ^[10]

In this note, we’ll look at some of the fund flows driving markets and the latest economic trends.

Following Fund Flows

Investor interest in the money-market funds and cash-like products favored last year has plateaued. ^[11] Instead, risk appetite has increased for stocks and bonds as the economy and labor markets continue to hold up. ^[12] After bleeding assets for the past two years, U.S.-based mutual and exchange traded funds have attracted net inflows of $172 billion so far this year.^[13] Flows to U.S. stock and bond funds are now the strongest they have been since 2021, when interest rates were close to zero.^[14]

Source: https://www.wsj.com/finance/investing/bullish-investors-are-piling-into-stock-and-bond-funds-40bfa25d?page=2

A key reason for optimism has been booming corporate profits in the first quarter.^[15] The 97% of S&P 500 that have reported first-quarter earnings have beaten consensus by around 3%, while earnings estimates for the rest of 2024 have actually slightly risen.^[16]

Source: https://www.reuters.com/business/take-five/global-markets-themes-graphic-2024-05-31/

Signs of Slowdown

Corporate profits are accelerating despite signs of a softening economy — data shows both slowing inflation and a cooling jobs market.^[17]^, ^[18] This has provided a positive and supportive environment for stocks. Meanwhile, the Federal Reserve (“Fed”) continues to stress that they would like to see several months of inflation data heading back toward their 2% target.^[19] Even as they’re willing to be patient, traders have increased their bets that the first rate cut could come as early as September.^[20] However, markets are still doubtful of a second rate cut by the end of the year.^[21]

The last leg of descent for inflation could be quite tricky. A recent report by the Cleveland Federal Reserve Bank noted that it could take at least three more years for inflation to fall back to the 2% target.^[22] Considering that pandemic-era shocks like supply chain disruption and high consumer demand have largely resolved, other “very persistent” forces such as wage growth and corporate prices are fueling price pressures.^[23] Officials are in no rush to cut rates until inflation is tamed.

Consumer Spending

Inflation hits home squarely on consumer wallets. Real disposable incomes, which measure the capacity of consumers to spend, have risen only modestly over the past year.^[24] Household savings rates are at a 16-month low, as most cash saved during the pandemic has been exhausted and inflation has further eroded savings.^[25] Consumers are borrowing more, with credit card debt in the first quarter at $1.12 trillion, with overall household debt at record levels.^[26]

This explains why real spending fell in April and adds to evidence that the U.S. economy is coming down from the surprisingly strong pace set in 2023.^[27]

Source: https://www.bloomberg.com/news/articles/2024-06-02/key-engines-of-us-consumer-spending-are-losing-steam-all-at-once

What’s Next

As it reviews the next batch of economic data, the Fed will be mindful that while the decline in consumer spending in April likely contributed to the welcome fall in inflation, it may now be a question of how long the economy holds up.^[28]

At the most recent Fed policy meeting that took place on June 12, policymakers held interest rates steady and it looks as though the start of rate cuts could be delayed to as late as December.^[29] We might expect the market to be volatile over this upcoming period as the Fed waits for more data and as the Presidential election looms.^[30]

As the warmth of summer arrives, we’d like to honor and thank all the Dads and Father-figures in our lives for their ongoing support, hard work and dedication. Wishing everyone a summer of memorable new adventures!

From Your Friends at JSF

The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of NewEdge Securities, Inc. Neither JSF Financial LLC nor NewEdge Securities, Inc. gives tax or legal advice. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase, sale or holding of any security. Investing involves risk, including possible loss of principal. Indexes are unmanaged and cannot be invested in directly.

Historical data shown represents past performance and does not guarantee comparable future results. The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or NewEdge Securities, Inc. as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

TLT-iShares 20 Plus Year Treasury Bond ETF seeks to track the investment results of an index composed of US Treasury bonds with remaining maturities greater than twenty years.

The Nasdaq Composite is a market-capitalization-weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or debenture securities.

Treasury Bond- is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years.

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP is the most commonly used measure of economic activity.

By clicking on these links, you will leave our server, as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.

[1] https://www.bnnbloomberg.ca/traders-pull-forward-first-full-fed-rate-cut-to-november-ahead-of-jobs-1.2068335

[2] https://www.bloomberg.com/news/articles/2024-05-30/stock-market-today-dow-s-p-live-updates

[3] https://www.wsj.com/finance/stocks/global-stocks-markets-dow-news-05-31-2024-62b25a39

[4] https://finance.yahoo.com/news/stock-market-today-stocks-cap-another-winning-month-sp-500-logs-best-may-since-2003-201504465.html

[5] https://finance.yahoo.com/news/stock-market-today-stocks-cap-another-winning-month-sp-500-logs-best-may-since-2003-201504465.html

[6] https://www.wsj.com/finance/stocks/this-record-stock-market-is-riding-on-questionable-ai-assumptions-cb890703

[7] JPMorgan Traders See Nvidia, Economy Fueling S&P 500 Gains – Bloomberg

[8] https://www.bloomberg.com/news/articles/2024-05-30/stock-market-today-dow-s-p-live-updates

[9] https://www.bnnbloomberg.ca/traders-pull-forward-first-full-fed-rate-cut-to-november-ahead-of-jobs-1.2068335

[10] https://www.bloomberg.com/news/articles/2024-05-30/stock-market-today-dow-s-p-live-updates

[11] https://www.wsj.com/finance/investing/bullish-investors-are-piling-into-stock-and-bond-funds-40bfa25d?page=2

[12] https://www.wsj.com/finance/investing/bullish-investors-are-piling-into-stock-and-bond-funds-40bfa25d?page=2