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Markets In June: Mixed Results Amid Cooling Inflation and Economic Data Thumbnail

Markets In June: Mixed Results Amid Cooling Inflation and Economic Data

Markets in June

  • Inflation but also economic data slowed in June causing a very mixed month in the markets. Mega-cap tech led again pushing the S&P 500 up 3.5%, while Midcap, Small Cap, EAFE, and the S&P 500 Equal Weight indices posted losses. Almost two-thirds of YTD returns have come from less than 10 stock
  • Five of eleven sectors were up. Tech, Consumer Discretionary, and Communication Services were up 9.3%, 4.9%, and 4.8% respectively. Whereas Utilities, Materials, Energy, and Industrials were down 5.5%, 3%, 1.3%, and 1% respectively.
  • Overall, the labor market, wage growth, consumer spending, and inflation all seem to be cooling, giving more confidence that the Fed may be able to cut rates later this year. Interest rates fell slightly in response. Most analysts have been moving their year-end stock market projections higher recently. However, some believe that the consumer has finally ran out of excess savings and the cooling in the job market could begin to escalate quickly. See economic data below.
  • The Fed decided to hold the Fed Funds Rate unchanged for the 7th consecutive meeting. However, they signaled only one rate cute for this year vs the three projected in their last SEP report.

Why It Could Keep Going Higher

  • The primary driver of U.S. economic growth is the U.S consumer and most Americans are fully employed and enjoyed significant wage gains over the past couple years. Most with low debt service costs.
  • Inflation continues to decelerate, albeit slowly and the Fed has signaled that they plan to cut rates sometime this year.
  • Earnings are expected to grow between 8% - 12% in 2024.
  • Fiscal policy is still providing a tailwind to economic growth.
  • Artificial Intelligence capex and promises of productivity gains are still in the early stages.
  • There is a lot of cash still on the sidelines and investors may put it to work on the fear of missing out.

Biggest Risk

  • Inflation and the Fed’s response to get it under control are still the biggest risks the economy faces currently. Fed policy impacts the economy with a significant lag so it is hard to determine what the future effects will be from the current rate hikes.
  • Valuations are stretched and if earnings do not live up to expectations, a sell-off could occur. 
  • Some research reports indicate that excess savings accumulated during the pandemic may have already been depleted and consumer spending is showing signs of cooling.
  • Credit card debt has reached an all-time high. Delinquency rates are rising on auto loans and credit card balances, and we’re starting to see an increase in bond defaults, albeit all from below average levels. 
  • If the economy does begin to slow down, high wage costs may force employers to lay off workers to maintain profit margins.
  • Additional bank failures and commercial real estate defaults.
  • Further Geopolitical tensions.

Economic Data

  • Nonfarm payroll data showed 206k jobs added in June, slightly more than expected. However, the 272k reported in May was revised down to 218k. The unemployment rate rose to 4.1%.
  • The JOLTS report showed job openings rebounding slightly to 8.1M but the number of job openings to unemployed worker remained unchanged at 1.22.
  • CPI was flat and Core CPI was up 0.2% in May over the month. The smallest increase since August 2021. Core CPI was 3.4% over the year.
  • Core PCE rose only 0.1% in May and 2.6% over the year. Still higher than the Fed’s 2% target but moving in the right direction.
  • PPI was up 2.24% over the year in May, the second month above 2%.
  • Personal Income was up 0.5% in and personal spending was up 0.2% in May.
  • Retail sales were soft rising only 0.1% in May and Aprils being revised lower 0.4%.
  • Housing starts fell 5.5% in May to the slowest pace in four years.
  • New home sales fell 11.3% in May.
  • ISM Manufacturing index slipped to 48.5 in May.

What We Are Doing

We are still optimistic that the most important metric for stock market performance, corporate earnings, will continue to grow into the next quarter. However, with valuations high, economic data and consumer spending showing signs that they may be weakening, and the U.S. election moving closer we will likely use any significant rally to take a little of the growth off the table. However, we also continue to expect more volatility ahead and we would see any market pull backs as a likely buying opportunity rather than the start of a significant bear market.

One of the main areas we are watching closely is if the recent cooling in employment data begins to level off or shows signs of cracking. Our overweight allocations in US large cap stocks and underweight in investment grade fixed income have allowed us to outperform our diversified benchmarks so far YTD. 

We will continue to watch the economic dynamic carefully to take advantage of opportunities as they present themselves.

The contents of this communication do not constitute a research report or a research recommendation. The information provided in this communication is prepared by Freedom Family Office, for your information only and is not intended to constitute a current or past recommendation, nor is it to be seen as an indication that a suitability assessment has been performed and that the security is appropriate for your customers. Information obtained from third-party sources is believed to be reliable but not guaranteed.