MTC Market Insights
June 1, 2024
Data Driven
Key Takeaways
- Inflation remains elevated, prompting investors to recalibrate their expectations for rate cuts by the Fed.
- U.S. equities achieved new highs, with outsized contributions from big technology players.
Inflation trends have moderated, but levels remain too high for the Fed’s comfort and investors continue to reassess their expectations for a Fed rate cut. Inflation and corresponding central bank policy have been pivotal to capital markets globally. While there could be growing anxiety that inflation is not retreating more quickly, other data indicate economic health and brighter prospects.
More Than Inflation
U.S. economic growth moderated in the first quarter, revised slightly lower from 1.6% to 1.3%1. The personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, was also revised slightly lower to 3.3%1 and consistent with the Consumer Price Index (CPI) inflation measure. With CPI, influential components like shelter (housing) remain elevated. However, shelter has historically been a lagging inflation component. With slower growth, we expect shelter pricing to also moderate which could open the door for Fed rate cuts. The market is now pricing in only 1 to 2 rate cuts for 20243.
While the inflation outcome is critical, other data points indicate that our economy is managing well in this environment. For instance, consumer spending, which contributes over two-thirds of GDP, has remained strong. The unemployment rate is below 4%2. Real wages have trended higher. Consumer sentiment is finding support. On the business front, the NFIB small business optimism survey indicates lower confidence4. However, broader business activity strengthened recently, as seen in the U.S. Composite Purchasing Manager Index (PMI) Output Index, which climbed to its highest level in over two years5. If U.S. consumers hold firm and business strengthen, we expect continued economic growth for the remainder of the year and into the next.
Milestones
In May, the S&P 500 Index hit a new record high rising +4.96%4. Technology was a notable driver with the tech-heavy NASDAQ Composite Index returning +6.98%4. The S&P Utilities sector rose +8.97%4 driven by the anticipated energy needs of artificial intelligence (AI). The Dow Jones Industrial Average (DJI) surpassed the 40,000 level in May. While these records are noteworthy, additional items warrant consideration. Quarterly earnings results were strong, but a resurgence in four tech-related stocks drove much of the upside for the S&P 500. The “Magnificent 4” stock cohort (Nvidia, Microsoft, Apple and Alphabet) added more market value than the rest of the Index constituents combined6. The DJI milestone and future ones require smaller percentage gains than previous (and lower) milestones. Overall good results, but we are monitoring concentrations and would caution not to place too much stock in milestones.
We maintain our positive stance on U.S. equities due to the steady fundamentals. We remain neutral toward duration with our fixed income exposures and expect more interest rate volatility in the near term. As we approach the second half of the year, market volatility will likely rise as eyes turn to the Presidential election. This could introduce tactical investment opportunities to be made alongside our long-term, strategic positioning.