An economic slump is emerging in the United States.

There was a significant slowdown from the 3.4% growth rate seen at the end of 2023 to the 1.3% growth rate seen in the first quarter of 2024, down from the 1.6% early forecast. With retail sales remaining steady in May and default rates on credit card and vehicle loans on the rise, consumer spending, the engine that drives U.S. GDP growth, seems to be fading. U.S. industrial production has resumed its downward trend following a brief upturn, and the unemployment rate in the country has climbed to 3.9%.

U.S. shares: artificial intelligence defense and offence.

U.S. stocks made a solid comeback in May, even though there was no positive economic data to report. The technology sector was the clear leader, thanks in large part to a spike in artificial intelligence-driven profits at chipmaker Nvidia (+26.9). Still, the second-strongest sector was utilities (+8.7%), as investors sought relative values, utilities as an artificial intelligence energy bet, and utilities' more stable dividends and profits as a buffer against a weakening U.S. economy.

Stocks in other countries: Europe comes in second.

European stocks (+4.8%) showed signs of strength relative to their U.S. counterparts, which was expected given the region's record-low unemployment rate and the fact that the European Central Bank is contemplating interest rate cuts in light of recent data showing a small increase in May inflation (+2.6%), the first increase in five months. For the Middle East, which relies heavily on oil, a stronger currency and increased inflation forecasts were significant headwinds, causing emerging markets to suffer (-5.7%).

Investment Returns: Rates decline somewhat.

Although U.S. inflation dipped somewhat in May (3.4% CPI and 3.6% core CPI), it is still much higher than the Federal Reserve's 2% objective. Core Personal Consumption Expenditures (PCE) Index, the favored inflation indicator of the Fed, came in at 2.8% and was heading downward. U.S. rates are still close to 2024 highs, but they dropped somewhat to around 4.5% on 10-year Treasuries. On the other hand, may saw the largest influx of new municipal bond issuance in two years, which led to an increase in yields.

Renewable energy is a real asset.

Like utilities, renewable energy infrastructure equities had attractive valuations, defensive traits, and a long-term demand for energy—including the energy needed to power the ongoing development of AI—which contributed to a 10.6% increase in May, making them the best-performing real asset category in the public markets. Among the many types of real assets, traditional infrastructure has done the best, returning 13.6% in the last year (+6.3%).

Other options: Opportunities for distressed credit.

Financing private equity and real estate acquisitions has become more expensive due to higher U.S. interest rates, which has created some challenges for both industries. Still, private market stocks should be well-positioned for investment in private credit during the ongoing buffeting of interest rates. Securitized loans, such as CLOs (Collateralized Loan Obligations), which pool many bank loans, may provide high returns with little risk.

Our Take

U.S. inflation down from 9% in 2022 to below 4% than it has been to get it down a few of percentage points to the Federal Reserve's 2% objective. Yes, the supply chain issues caused by the conflict in Ukraine and COVID-19 are mostly in the past, and the surplus of savings accounts held by American households ultimately disappeared this spring. Corporate profits and stock market returns have been bolstered by above-trend growth in the previous few quarters, which is normal in the late stages of economic cycles. As a result of the environment's ability to keep consumption high for an extended period of time, inflation becomes more persistent.

It will certainly be difficult to get through the stickier phase of inflation as we go into the second half of 2024. Annual infusions of $100 billion to $200 billion continue to flow into the economy via the Jobs and Infrastructure Act, the Inflation Reduction Act, and the CHIPS Act, while consumer spending and the labor market are generally solid.

The current expectation is that inflation will be reined down by using the harsh instrument of earlier interest rate hikes. Most of the eleven interest rate hikes implemented by the Federal Reserve since 2022 have already had an impact on the American economy (16 months is the usual lag period), but the most recent three hikes have not yet taken full effect. How much more powerful than what we've been experiencing thus far? We are starting to notice signs of a weakening economy, thus it's feasible: Reasons for the slowdown in consumer spending include customers choosing cheaper alternatives, consumer credit delinquencies, a decline in manufacturing, a weakening labor market, a less strong real estate market, and a decrease in the rise of consumers' disposable income.

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