The U.S. economy at mid-year continued to show signs of continued resilience and growth—even if such strength remains uneven throughout all sectors.
The labor market consistently added jobs in the second quarter but has not kept up with expectations and, more recently, showed signs of slowing. The report for June showed the U.S. added 206,000 jobs but that number was heavily boosted by government hiring. In addition, there were downward revisions to the job numbers for April and May, lowering the 3-month job growth average to 177,000, the slowest pace since January 2021. The unemployment rate also ticked up in June—a further signal that job growth may be slowing.
Inflation numbers for May and June showed a return to a downward trend after increasing unexpectedly at the end of Quarter 1. The Federal Reserve viewed this as what chair Jerome Powell called “progress” but it has not been enough for the Fed to announce a definite date for interest rate cuts.
The stock market is up for the year to date with the S&P 500 reaching historic highs on heavy gains in technology. In June, Amazon joined Google’s parent Alphabet, Microsoft, Apple and chip maker Nvidia as part of the exclusive $2 trillion club. Also in June, Nvidia hit $3 trillion and briefly became the most valuable company on Wall Street.
Third Quarter and Beyond
Interest rates: Hopes for as many as three interest rate cuts by the Federal Reserve this year faded with the uptick in prices in March. The economic mood turned pessimistic as some analysts began to foresee the possibility of another interest rate hike.
But optimism had returned by summer as prices began to ease and the Fed left rates unchanged for the seventh consecutive time in mid-June. Many Fed-watchers now believe the Fed will leave rates alone at its end-of-July meeting and are predicting a rate cut in September.
Consumer sentiment: One additional sign the economy may be cooling is the slowing of consumer sentiment, which had been robust and was responsible for GDP growth earlier this year.
A huge demand in travel and leisure for the summer season may help extend the willingness to spend. But recent surveys reveal households are still feeling inflation fatigue on day-to-day essentials, even if post-Covid demand for fun and vacations lingers.
Stock market: Stocks are expected to continue to remain volatile throughout the rest of this year. Stocks are also likely to continue to be sensitive to global and political developments such as conflicts in Ukraine and the Middle East and the upcoming U.S. election.
Not surprisingly, Artificial Intelligence technology and obesity drugs have been responsible for much of the buzz and the upward trend on Wall Street, especially in the S&P 500.
Our Outlook
The latest Lesko Financial Services Investment Committee outlook remains optimistic for the economy and capital markets through the end of 2024, even if seasonality, Fed policy and uncertainty related to the U.S. presidential election lend caution to the current signals.
Signs of inflation are easing but not enough for the Fed to make significant multiple interest rate cuts this year. We anticipate one rate cut in September or December.
We note that all major indexes are positive to date with the DJIA at +3.83%, the technology-heavy S&P 500 at +14.73, and the mostly technology NASDAQ Composite at +18.98%, while the US Total Bond Market is at -3.01%. This shows that stock market returns this year haven’t been equally distributed and the largest gains have been concentrated in a handful of companies and sectors.
It’s critical to remember this when comparing your returns to what you hear from others and in the news. A diversified portfolio is still a solid strategy because it generally carries less risk than a concentrated portfolio and can help protect you when markets turn negative. Diversified portfolios also tend to generate income, regardless of market direction.
The LFS Investment Committee is anticipating that participation in the stock market rally will broaden as summer continues and as we move into fall. We also see the broader bond market becoming positive as the Fed gets nearer to cutting interest rates. We continue to recommend that most investors maintain a core diversified allocation to stocks, bonds, and cash. This may be the ideal time to review your own portfolio with your Advisor to help you stay on track with your financial goals this year. We look forward to serving you and hope you enjoy the best that summer has to offer.