Week of August 19th, 2024

Key Points for the Week

• The S&P 500 bounced back with its best week of the year, as recession fears receded
• We remain in a bull market, but we also expect potential volatility over the coming months heading into the election
• Retail sales surprised strongly to the upside showing the consumer still has a lot of staying power as the engine of the expansion
• High interest rates continue to weigh on housing and industrial activity
• With inflation increasingly benign, the markets will want to see a Fed that is willing to normalize tight policy

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

Economic Update

After two weeks of slow and jolting market performance, a bounty of positive news calmed investors and lifted stock markets higher last week.

“Investors seem to have come to the realization that while the economy may be in fact slowing, the Federal Reserve is going to take action to address that by cutting interest rates on Sept. 18…with a September rate cut a near certainty, the mood in the market has turned on a dime,”

↳Paul R. La Monica of Barron’s

Inflation continued to move lower.

In July, prices rose 2.9 percent year to year, according to the latest Consumer Price Index report. That was an improvement on June’s 3.0 percent increase. The price of gasoline, new and used vehicles, and medical care moved lower, while the cost of shelter, motor vehicle insurance and recreation moved higher.

“It was the first time that the annual pace of inflation was below 3 [percent] since spring of 2021. Even though June’s inflation reading was slightly better, the pricing data from last month will likely help convince Fed officials to cut interest rates by at least a quarter of a percentage point at their next policy meeting in September,”

↳Megan Leonhardt of Barron’s

Consumer spending remained strong.

Consumer spending is the engine that drives the American economy. After slowing (down 0.2 percent) in June, retail sales accelerated (up 1.0 percent) in July, according to the U.S. Commerce Department’s Advance Monthly Sales for Retail and Food Services.

“The retail sales numbers were a blowout versus consensus [expectations], but more importantly it should lay to rest (at least for the moment) all of the ‘doom and gloom’ that was expressed at the beginning of this month,”

↳Rita Nazareth of Bloomberg

Consumer sentiment brightened.

In August, for the first time in five months, consumer sentiment improved, according to the University of Michigan’s Consumer Sentiment Survey. Joanne Hsu, the Survey of Consumers Director, wrote:

“Overall, expectations strengthened for both personal finances and the five year economic outlook, which reached its highest reading in four months, consistent with the fact that election developments can influence future expectations but are unlikely to alter current assessments. Survey responses generally incorporate who, at the moment, consumers expect the next president will be. Some consumers note that if their election expectations do not come to pass, their expected trajectory of the economy would be entirely different. Hence, consumer expectations are subject to change as the presidential campaign comes into greater focus, even as consumers expect that inflation—still their top concern—will continue stabilizing.”

Major U.S. stock indices finished the week higher. The yield on longer maturities of U.S. Treasuries moved higher over the week.

This Week in the Markets

Two weeks ago the S&P 500 fell 3% for its worst day of the year, as fears over a recession, a Federal Reserve (Fed) being behind the curve on interest rate cuts, and the yen carry trade dominated markets. Here we are two weeks later and stocks are a few good days away from new highs.

The S&P 500 gained 4% for the best week of the year and strongest week since last November. In fact, the best and worst day of the year so far were within just a few days of each other. This perfectly normal, as volatility tends to cluster and big moves (in both directions) tend to happen in close proximity to each other.

How rare was last week? All five days were higher, and the gain for the week was solid at over 3.5%. The last two times that happened were February ’21 and November ’23. Note that six months later stocks were up another 14.1% and 19.0%, respectively, so on the surface this doesn’t appear to be a bearish signal.

Stocks were not only up every day last week, but they are currently up seven days in a row for the second time this year. We looked and found the last 12 times the S&P 500 had at least two separate 7-day win streaks during the calendar year, and stocks were higher for the year all 12 times and up more than 18% on average. Given stocks are up more than 14% this year currently, we could see potentially more gains before 2024 is over. Since 1990, this is the 33 rd  7-day win streak and wouldn’t you know it that future longer-term returns after these blasts of strength tend to support the bulls, with the S&P 500 higher 80% of the time six months later and up a median of 7.0%, and higher a year later more than 83% of the time and up a median of nearly 12%.

But We Aren’t Out of the Woods Yet

Even the best years have a few bad days and scary headlines. But are we out of the woods yet? Take note that historically the months leading up to US elections can be quite choppy and volatile. 2016 and 2020, for instance, both saw significant weakness leading up to the election, then strong rallies after.

But what investors need to know is if they get scared and get out, they will likely also miss some of the best days of the year. We looked and found a $10,000 investment in the S&P 500 over the past 20 years would be worth close to $64,000 if you held onto it, but if you missed the best 10 days that was more than cut in half to less than $30,000 and it only gets worse from there. We like to say it is about time in the market, not timing the market and this is one of the best ways to show this. If you get out to wait for more clarity or for less uncertainty, just know you’ll probably miss the best days and this could cost you in the end.

Recession Narrative Fades on Strong Retail Sales

As long as employment is strong, consumer spending will be strong. Yes, job gains slowed in July but prime age (25-54) participation in the labor market remains near record levels, layoffs remain low, and aggregate income growth has been solid. Those numbers were the underpinning of a large upside surprise in July retail sales. Headline retail sales came in at 1.0% growth for the month versus expectations of 0.3%. Core readings also surprised to the upside, with retail sales ex-autos climbing 0.4% versus a 0.2% consensus expectation and the “control group,” which best captures the consumer spending category in GDP calculations, climbed 0.35% versus a 0.1% consensus expectation.

Given the somewhat gloomy economic expectations still baked into the market following the weaker-than-expected August 2 jobs report, the market response was decisively positive. Prior to yesterday, market gains on retail sales day had generally been in line with average returns—this hasn’t been a market-moving report, unlike the CPI inflation report and monthly jobs report. But yesterday’s reaction was the strongest in the last 10 months independent of direction.

S&P 500 Index gains weren’t the only sign that the retail sales report shifted the market picture of the economic outlook. The market-implied odds of a 0.50%-point hike at the Fed’s next policy meeting dropped another 10 percentage points after the release, from 37.5% to 27.5% according to CME calculations. Also, after three days of declines, the 10-year Treasury yield popped from 3.82% to 3.92%. And finally small cap stocks caught a bid, the Russell 2000 Index of small cap stocks climbing 2.5% versus the S&P 500’s 1.6% gain. When yields rise but small caps outperform in the current environment, it’s likely that a change in growth expectations is the main driver.

While retail sales drew the most interest, there was a flood of economic data yesterday and there were some signs that the Fed’s tight policy continues to weigh on the economy. While the weekly jobs data on unemployment insurance claims continued to allay some concerns of a weakening job market, industrial production pulled back and has been easing since 2022 despite supportive fiscal policy.

Household spending is the engine of economic growth in the US, but industrial production, which includes manufacturing, mining and drilling activity, and utilities, remains an important secondary gauge of the economy’s health. In fact, despite the upside surprise in retail sales the Atlanta Fed’s “Nowcast” of third quarter economic growth fell from 2.9% to 2.4% following Thursday’s data dump, primarily on a shift in expected inventory activity, which is part of the gross private domestic investment category. Expectations for final sales, which excludes inventory, held steady at 2.7%.

Looking at the retail sales report itself, the big driver of the upsidem surprise in the headline number was auto sales, not surprising given falling auto prices. Control group gains have been supported by electronics, online shopping (“nonstore retailers”), and health and personal care stores. That may be an indicator that while households have curtailed spending on some items, back to school spending remains a priority.

Overall, the economy’s underlying fundamentals are sound but there are segments where tight Fed policy is having a bite. You can see that in the industrial production data, but also the jump in mortgage activity after rates moderated even a little. Better data is moving market expectations towards just one hike in September, which is possibly more aligned with the Fed’s comfort level. That would likely be enough, although it would be important that forward guidance signal the Fed is aware of the risk of falling further behind the curve

Summer Camp is a Growing Industry

Many people have fond memories of sleep-away summer camps that feature hiking, canoeing, swimming and campfire songs. Others remember camp as a place where they learned about music, theater, dance, horseback riding, creative writing, environmental education or other activities.

After stalling during the pandemic, camp is once again a growing industry. A 2023 study conducted by the University of Michigan Economic Growth Institute and the American Camp Association (ACA) found, “camp contributes $70 billion to the national economy directly and through ripple effects, including via business-to-business purchases and labor income.” 10

About 26 million kids—more than 30 percent of school-age children in the United States—go to summer camp. As a result, day camps and overnight camps have become an important aspect of children’s education and growth reported Kira Garcia of Bloomberg.

“Today’s entrepreneurial camp directors are thinking beyond canoes and lakeside cabins,” wrote Garcia. “Want your kid to work on DJ skills, robotics or scuba diving? There’s a camp for that! Specialty programs were the industry’s fastest-growing segment prior to the COVID-19 pandemic and are predicted to be in increasingly high demand from 2023 to 2028.”

Camp is also important for parents. When the school year ends, working parents are left without structured supervision for school-age children. The struggle to juggle work, home and parenting responsibilities can be intense. Camp offers a way for children to refuel and reset, while participating in stimulating activities, reported Alex Frost in Success.

One issue for many families is cost. While the average cost of camp varies widely, the average cost is $87 per day, reported Nancy Chen of CBS News.The ACA reports there are ways to reduce or manage the cost of camp, including:

• Applying for a camp scholarship,
• Taking advantage of early registration discounts,
• Choosing a structured payment plan,
• Spending funds in a Dependent Care Flexible Spending Account, and
• Receiving the Child and Dependent Care Tax Credit.

If you’re looking for a present for a younger person, gifting a summer camp experience may be a good choice.

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

Corporate Transparency Act

The Corporate Transparency Act was enacted in 2021 and was passed to enhance transparency in entity structures to combat money laundering, tax fraud, and other illicit activities.

Beginning January 1, 2024, certain business entities created or registered to do business in the United States will be required to report identifying information about the beneficial owners to FinCen, the Financial Crimes Enforcement Network. Per FinCen rules, a beneficial owner is an individual or group of individuals who, directly or indirectly, owns or controls the company. Reporting companies typically include:

• Domestic reporting companies: Corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
• Foreign reporting companies: Entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with the secretary of state or any similar office.

FinCen has updated their FAQs that includes new information about the reporting process, reporting companies, reporting requirements and much more, with the expectation that further guidance will be provided in the future. The updated FAQs can be found here.

Did you Know? This Week in History

August 19, 1964: The Beatles Kick Off First U.S. Tour

On August 19, 1964, more than six months after taking the East Coast by storm, the Fab Four travel to California to take the stage at the Cow Palace in San Francisco for opening night of their first-ever concert tour of North America.

The Beatles took America by storm during their famous first visit, wowing the millions who watched them during their historic television appearances on The Ed Sullivan Show in February 1964. But after the first great rush of stateside Beatlemania, the Beatles promptly returned to Europe, leaving their American fans to make do with mere records. By late summer of that same year, however, having put on an unprecedented and still unmatched display of pop-chart dominance during their absence, the Beatles finally returned.

Although in retrospect it would seem a laughable underestimation of their drawing power in America, Beatles’ manager Brian Epstein chose venues like the 17,000-seat Cow Palace for the 1964 tour expressly because he feared that the Beatles might not sell out large sports stadiums like San Francisco’s Candlestick Park, where they would play their final official concert in 1966. Suffice it to say that the Beatles had no difficultly filling the Cow Palace, which was packed with 17,130 screaming fans when the group bounded

Weekly Focus

One of the core goals of life is survival; the other is meaning.

Sebastian Junger, American Journalist and Writer

Age is of no importance unless you’re a cheese.

Billie Burke, Actress