Market Commentary - May 2024
Commentary by Peter Boockvar
After experiencing a dip in April following five consecutive months of gains, the S&P 500 rebounded in May, recovering its losses from the previous month and reaching a record high close of 5321 by mid-month[1]. The move was helped by a modest fall in interest rates which was after the jump seen in April. The 10 yr. yield closed May at 4.50% on the dot after rising by 48 basis points in April to 4.68%[2]. The 2-year yield, highly sensitive to Federal Reserve monetary policy expectations and changes in the fed funds rate, decreased by 16 basis points during the month to 4.87%, after closing above 5% at the end of April[3]. Also helping stocks was another positive quarter of tech earnings, particularly from Nvidia which continues to behave like its own asset class benefiting from the large AI capital spending plans by its customers. Earnings were more mediocre outside of the largest companies in terms of growth. However, small-cap stocks, which are particularly sensitive to the current higher cost of capital environment, also rebounded from the April pullback, as did most international stock markets.
The macro-economic picture I believe remains remarkably mixed and uneven both domestically and internationally. In the US and globally for every economic pro, there is a con. Let’s take the US housing market. The pace of existing home sales as measured by data from the National Association of Realtors and Mortgage Bankers Association, is hovering around the lowest level since 1995 in response to a 7%+ mortgage on top of record high home prices which are up about 6% year over year and by 49% since 2019, according to S&P CoreLogic. This impacts not just the direct turnover of homes but all the things that don’t get done when a home isn’t passed on to a new buyer, and the seller doesn’t buy something else. Negatively impacted things, such as new paint, carpeting, flooring, etc. On the other hand, with the large need for more housing supply, builders are bringing more product to market, especially from the larger builders who have the ability to both buydown one’s mortgage rate but also provide other discounts.
Let’s look at the US consumer, especially after hearing from a slew of retail company earnings reports over the past few months. Paraphrasing what I heard from many, the lower to middle income consumer is more value conscious and choiceful with their purchasing decisions. More signs are being seen that consumers are trading down to private label brands from well known brands. On the other hand, higher income spenders are keeping on with their buying, though there has been a continuation of the shift for all income deciles that are spending more on services and experiences rather than goods that they all stocked up on during Covid. Travel spending has been a particular bright spot as have sporting events and concerts.
US manufacturing, and globally for that matter, remains in a modest contraction but showing signs of bottoming. Bottoming though has yet to result in a rebound in inventories getting rebuilt, but we are watching this situation closely. On the other hand, government spending has been so enormous, reflected in a 6% budget deficit as a percent of GDP that is usually seen in recessions, not expansions. That has helped to lift parts of the economy that are benefiting from this. We also have the CHIPS Act, the Inflation Reduction Act and the infrastructure legislation that is all encouraging the building of semiconductor and battery plants, encouraging other renewable investments along with roads, bridges, tunnels, etc. The ancillary impact is also for those providing labor, raw materials, and services to all this government incentivized activity.
With regards to the labor market, a variety of signals, such as the level of job openings, continuing claims, payrolls, and anecdotal signals in some business confidence surveys are all pointing to a slowdown in the pace of hirings but still to a muted rate of firings. Adding all the economic factors together, the US economy grew by 1.3% in Q1, and the most recent Atlanta Fed GDPNow forecast is at 1.7% for Q2.
Looking overseas, the Eurozone economy, along with the UK are seeing modest growth. As measured by GDP, growth in Q1 was about 1% annualized for both[4]. China’s economy is reflecting a mix of things where its residential real estate market continues to be under pressure, but authorities are taking bigger steps to stabilize it. With respect to its manufacturing prowess, it remains sluggish. On the other hand, consumer spending on travel and leisure has helped to offset softness with spending on goods. India’s economy has been growing robustly and growth in Southeast Asia has been pretty good too. Japan’s economy has been mixed but showing a vibrancy not seen for a while, especially reflected in the Nikkei that finally exceeded its 1989 bubble highs.
On to the inflation story because of its big influence on monetary policy and economic growth. In the US, the inflation stats seen in May reflect a sideways trend after the slowdown in the pace of increases seen since the 2022 peak of about 9%, according to CPI. Inflation too has gone sideways in the Eurozone, but the European Central Bank is set to cut interest rates this month. With regards to the Federal Reserve, I believe they do want to cut interest rates this year, but they are being more patient than the ECB. I do think if we get further economic slowing and a further rise in the unemployment rate, they will feel more pressure to cut even before the inflation figures get to their 2% target level on a sustainable basis.
What could complicate the jobs of the central bankers is the rebound in commodity prices seen this year off last year’s lows. Through May, the CRB commodity index was up 10% year to date with particular outperformance in gold, silver, copper and other industrial metals[5]. Also of note, container shipping prices have jumped this year in response to the shipping diversions away from the Red Sea because of the Houthi attacks.
Conclusion
There is nothing more uncertain than the future and a reality we all must deal with. In the investment and forecasting business, that is most impacted by what comes next rather than what has already occurred, it’s seemingly even more important and why we’re always humble about this business but diligent when it comes to investing client money in terms of constantly gauging the risk and reward and taking a long-term time horizon perspective. That allows us to ignore much of the short-term noise and focus most on the bigger picture. I say this all because it now seems like we’re in an even more uncertain time and so many cross currents to juggle
We acknowledge that we live in a different macro world than enjoyed in the 15 years pre-Covid and need to have eyes wide open on how things play out from here. While the interest rate levels currently could be construed as ‘normal’, there is still an adjustment period to them because the prior few decades saw interest rates as ‘abnormal.’ There is an ongoing debate within the Fed as to what is restrictive monetary policy and what is not. The answer is not it is, or it isn’t. It is for some, for those that have debt coming due this year or next, but it hasn’t proven to be for the financial markets and is actually stimulative for those that are earning higher interest rates on their savings.
This gets to my point earlier about how mixed and uneven things seem. Whatever comes our way though in this very tricky investing landscape, it remains vital that investors have adequate short-term liquidity over the next 2-3 years. Knowing that period is covered can help separate the balance of one’s portfolio from the ups and downs of the markets. Time horizon is always crucial and is always the best friend of any investor. We are not just in the asset management business but also in the risk management business and always believe that by watching our back and focusing on the risks, the upside should take care of itself.
Disclaimer
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Stoxx Europe 600 index also called the STOXX 600 is an indicator of the performance of the European stock market. It measures the performance of large mid and small-cap companies across 17 countries in Europe. The number of constituents is fixed at 600.
The Hang Seng Index is a freefloat-adjusted market-capitalization-weighted stock-market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 82 constituent companies represent about 58% of the capitalization of the Hong Kong Stock Exchange.
Nothing in this material should be construed as investment advice offered by Bleakley Financial Group, LLC or Peter Boockvar. This market update is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. No chart, graph, or other figure provided should be used to determine which securities to buy, sell or hold. No representation is made concerning the appropriateness of any particular investment, security, portfolio of securities, transaction or investment strategy. You should speak with your own financial professional before making any investment decisions.
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The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
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1] Bloomberg
[2] Bloomberg
[3] Bloomberg
[4] Bloomberg
[5] Bloomberg