June 7, 2024 – As we step into summer, thinkof US economic growth as a car that is no longer accelerating, but is still moving forward, powered by its own momentum. With a moderate 1.3% annualized growth in the first quarter of 2024, the Fed’s monetary tightening finally appears to be working. Unemployment remains at historical lows, but here too, the momentum could be shifting. A review of earnings call transcripts shows that mentions of Expense Management have reached their highest level since 2016.
Inflation continues to be a focal point for investors. After a sharp drop from 9.1% in June of 2022 to 3% in June of 2023, the fight against inflation seems to be stalling, with inflation lingering stubbornly around 3%, well above the Fed’s 2% target.[1] With high inflation and a slowing economy, the Fed faces a tough decision on the future direction of interest rates. Further interest rate hikes seem unlikely, but predicting the timing of rate cuts is increasingly challenging.
Still, the US economy is holding up well, especially compared to Europe and China. The European Central Bank cut interest rates by a quarter percent this week, taking the lead from the traditionally monetary-policy-dominant Federal Reserve. This cut, the first since 2019, highlights the gap between the US, which has enjoyed strong economic growth despite rate hikes, and Europe, which has been largely stagenent since 2022.[2]
Despite signs of a slowing economy, stock market investors remain bullish, driving the stock market up 5% in May alone.[3] These gains are heavily concentrated in a few mega-cap companies, the anticipated winners of the AI race. Importantly, these companies also have fixed-cost debt and large cash reserves, and are thus less vulnerable to higher interest rates. As a result, the equal weight S&P 500 has only risen 4.2% this year, compared to 11% for the traditional S&P 500. The bond market saw a 1.3% increase in May, but trading was volatile due to large treasury auctions, a trend worth watching as government debt continues to rise.
As the first presidential debate approaches, the candidates’ platforms are taking shape. Both include inflationary policies, from tariffs to increased government spending, which will likely keep yields higher for longer. Brace for increased stock market volatility as the election draws closer, but remember that elections typically have little long-term impact on stock market growth.
Wishing you a happy and peaceful start to the summer.
–AMD
[1] https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm
[2] https://www.wsj.com/economy/central-banking/ecb-cuts-interest-rates-for-first-time-since-2019-b2707c65?mod=hp_lead_pos2
[3] Robertson Stephens Investment Office
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