The consumer outlook is influenced by income group, yet aggregate data indicates that the economy will continue to be resilient. As a result of increased borrowing rates and stock market gains, the wealthiest 10% of earnings now account for over half of all consumer expenditures. Credit card and vehicle delinquencies are on the rise, and lower-income people are already struggling to pay for necessities like food due to inflation.
Investors who were anticipating a Fed interest rate drop at some point this year were pleased by a mid-month hint that inflation is not reaccelerating (2.4% annualized). During the first half of 2024, large-cap stocks had gains of over 15%, while the technology sector saw gains of over 28%. Despite what seems to be reasonable pricing overall, small-cap firms are nevertheless struggling due to excessive borrowing costs and, in certain areas, a lack of profitability.
Globally, emerging markets (EM) outperformed developed market equities, which declined with U.S. small caps. The slow consumption, average industrial production, and disappointing profits that China(-1.9%) has been experiencing for some time are still a problem. The stock markets in Taiwan (+11.9%), South Korea (+8.8%), and India (+7.0%) erupted as investors saw opportunities to profit from reshoring and AI advancements, but only indirectly.
Despite intra-month volatility caused by fluctuating views on inflation and Fed policy, the 10-year U.S. Treasury yield ended June roughly where it began, slightly around 4.5%. Although municipal bonds have been doing well recently, they may encounter difficulties in the future due to the fact that many cities are rushing to issue new bonds before the November presidential election and the possible expiry of the Tax Cuts and Jobs Act in 2025, both of which might make it harder for towns to get money.
As U.S. interest rates jogged slightly up towards the end of the month, equities in the renewable energy and conventional infrastructure sectors were among the worst performers. As a whole, commodities fared poorly, with the exception of the energy sector (+4.1%), which benefited from rising oil prices. In contrast, real estate investment trusts (REITs) did very well, with certain high-profile deals indicating that some subsectors, such apartments (+5.8%) and self-storage (+7.3%), may have weathered the storm.
Rising U.S. interest rates in 2022 and 2023 posed a danger to funding for firms in their seed stage and beyond, which had a substantial impact on private equity values. Capital is actively flowing again in 2024, although selectively. There will likely be fewer overall private equity deals for a while as venture-backed firms strengthen their financial positions, with capital still going after the best of the best.
As we separate market noise from secular shifts, we will keep our emphasis on the possibility of modifying our strategic positions. What, then, are some of the factors that have caught our eye and have the potential to test the resiliency of the American market and economy?
The jobless. The unemployment rate in the United States rose over 4% for the first time in 27 months in May. In the six decades after 1949, a recession followed after each of the six such streaks, as the unemployment rate continued to rise sharply. Not predicting a repeat performance, but definitely cause for concern.
High levels of uncertainty. Due to the markets' growing anticipation of the November presidential election and its possible effects on fiscal, trade, and immigration policy, as well as the possibility of a contentious election that could undermine faith in the United States as a model of democracy and capitalism, this unwelcome houseguest is likely to make an appearance this summer.
AI future. The performance of the U.S. equities market in 2024 has been led by corporations involved in artificial intelligence. The whole market might be affected by a change in fortunes, such less than stellar outcomes in sales and profitability.
Everything that is not known. During times of greater instability, like the one we are now experiencing, the likelihood of an unexpected shock to the system is higher, but it is never completely eliminated. As soon as an external shock transforms stability into instability, the homeostatic condition to which we have become used might vanish.