Week of July 15th, 2024

Key Points for the Week

• Based on the most recent CPI report, inflation has cooled off so far in 2024 compared to 2023. It is still running at a higher rate than the average rate for the past 10 years.
• The Federal Reserve may be shifting their focus increasingly to supporting employment.The recent Labor report had some troubling developments
• A rate cut by the Federal Reserve may be justified based on recent data, and may occur as early as September.

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

In May, Pew Research asked Americans about the biggest problems facing our nation. The top three answers were:

1. Inflation;
2. The ability of Democrats and Republicans to work together; and
3. The affordability of health care.

Last week, there was some good news about the first issue. Inflation became deflation as the Consumer Price Index (CPI) fell in June after remaining unchanged in May. Headline inflation was 0.1 percent month over month.

“The details under the hood, so to speak, also largely provided good news for consumers and Fed officials. Goods deflation continued — driven by falling new and used vehicle prices—while services costs also trended down. And housing costs, a persistently stubborn sector when it comes to progress in taming inflation, increased just 0.2% on the month — a slowdown from the consistent monthly readings of 0.4%.”

↳Megan Leonhardt,Barron’s

Cooling inflation may lead the Federal Reserve (Fed) to begin lowering the federal funds rate – and that would make borrowing less expensive. Optimism about lower rates led to a bond market rally, and a realignment in the stock market.

“Wall Street traders betting the Federal Reserve will be able to cut rates soon sent bond yields tumbling — while driving a big rotation out of the tech megacaps that have powered the bull market in stocks. Further signs that inflation is slowing down fueled speculation the Fed will be able to move as early as September. Optimism over lower rates sparked a shift into riskier corners of themmarket — as money exited the long-favored safety trade of big tech.”

↳Rita Nazareth, Bloomberg

Last week, major U.S. stock market indices moved higher with the Dow Jones Industrial Average hitting its first record high for 2024, reported Jacob Sonenshine. The yield on the benchmark 10-year U.S. Treasury note moved lower last week.

This Week in the Markets

Unexpected strength in the labor market has played a stronger role in extending the expansion than productivity growth so far this year, but we think the potential for productivity growth to play a meaningful role is still there. Consumer spending has played the role expected well, supported by job gains.

The economy appears strong, although seeing the Fed start to cut rates before the end of the year has become a more important factor in sustaining the expansion. There is still strong potential for productivity gains to help sustain the expansion and it will be important to monitor the numbers carefully in the second half of the year.

Inflation remained more stubborn than expected in the first half of the year pushing back rate cuts, but there has been meaningful progress more recently. We were out of consensus and quite conservative in the number of expected rate hikes heading into 2024 compared to the market, but with the more recent inflation progress, we may still see three hikes in 2024.

Stubborn inflation pushed back rate cut expectations, with the 10-year Treasury yield rising from 3.88% to 4.36% over the first half of the year. But much higher starting yields compared with 2022 and some additional compression in credit spreads limited losses for the Bloomberg US Aggregate Bond Index to 0.7% in the first half. That still lagged quite a bit behind the Bloomberg 1-3 Month Treasury Bill Index’s 2.7% return.

Inflation

The June inflation report was strong. The Consumer Price index (CPI) fell 0.1% in June, which was below expectations. Core CPI, which strips out the volatile food and energy components, rose just 0.1%. These were below expectations, and combined with April and May data, reverses the “heat” we saw in the first quarter inflation data.

CPI ran at a 1.1% annualized pace in the second quarter (Q2), bringing its six-month pace to 2.8%. That is still elevated relative to the Federal Reserve’s (Fed) target of 2%. But here is the thing: 35% of CPI is shelter, and official shelter inflation runs with significant lags to what we see in actual rental markets. Strip out shelter and here is what we have:

• CPI ex shelter ran at a -0.5% annualized pace over the last 3 months (Q2). The negative sign is not a typo.
• CPI ex shelter is up 1.6% annualized over the last 6 months, and 1.8% over the last 12.

Official shelter data is also looking positive from the perspective of what may be coming ahead. Rent of primary residences account for 8%-points of that, while “owners’ equivalent rent” (OER) accounts for the other 27% points. OER is the “implied rent” homeowners pay, and it is based on market rents as opposed to home prices. In June, these ran at the slowest pace in three years, and close to the pre-pandemic trend. It is easy to think of that as a blip, since it is much lower than recent months. But there’s reason to believe that May data was skewed upwards for idiosyncratic reasons, which means the downtrend is smoother, and likely to continue.

We also got the producer price index data for June on Friday, which along with CPI, serves as a partial input into the Fed’s preferred inflation metric, the Personal Consumption Expenditures Index (PCE). Core PCE is expected to be on the softer side as well in June, running between 0.1-0.2% for the month, going by estimates from our friends at Employ America.

The Fed May Need to Focus on Risks Other Than Inflation

Yes, the inflation data was hotter than expected in Q1. Fed Chair Powell was in front of Congress last week and said that the disinflationary trend was back on and that the risks to their “dual mandate” are double-sided. On the one hand, cutting interest rates too soon could undo the progress they made on inflation. On the other hand, cutting too late could unnecessarily undermine the expansion, and cause unemployment to continue to rise. This two-sided view of the risks is different from what he was saying a year ago, and acknowledges that there are rising risks in the labor market. We would add that risks are likely more skewed to the labor market side, rather than inflation. It looks like they are unlikely to cut rates at their July meeting in two weeks, but we could very well see them start the rate cutting cycle in September.

Stocks Reacted Positively

As soon as the June CPI report was released, Treasury yields collapsed lower. The 1-year yield fell from 5% to 4.89%, and the 2-year yield fell from 4.62% to 4.51%. These are essentially market expectations for monetary policy rates over the next one and two years. And markets are saying, the Fed will cut (the current policy rate is 5.25-5.50%).

If disinflation continues, that is going to help the stock market rally broaden out, beyond the recent gains we have seen for the largest technology companies in the world. Market action after the CPI report release underlined this. Stocks overall, at least as measured by the broad S&P 500 Index, fell almost 1% on the day. Even the Dow rose under 0.1%. But it was a different story under the hood, with over 400 stocks gaining. The ones that lost the most ground were the big technology names that have been surging recently. That is why the headline S&P 500 index fell (since large technology makes up over 30% of the index).

The Russell 2000 Index, a basket of small cap stocks, rose 3.6% on Thursday. It beat the S&P 500 by 4.5%-points, the most since March 2020. This is extreme and not something we expect to see replicated going forward. However, we think it is likely that we see the general theme of rotation –from large cap stocks to midcap and small cap stocks, and from technology stocks to other sectors – to play out over the reminder of the year. A broader rally amongst stocks is one reason to have a diversified portfolio, even within your equity allocation, where you are not betting on just one theme to play out.

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

July 16, 1935: World’s First Parking Meter Installed

The world’s first parking meter, known as Park-O-Meter No. 1, was installed on the southeast corner of what was then First Street and Robinson Avenue in Oklahoma City, Oklahoma on July 16, 1935.

The parking meter was the brainchild of a man named Carl C. Magee, who moved to Oklahoma City from New Mexico in 1927.

By the time Magee came to Oklahoma City to start a newspaper, the Oklahoma News, his new hometown shared a common problem with many of America’s urban areas—a lack of sufficient parking space for the rapidly increasingly number of automobiles crowding into the downtown business district each day. Asked to find a solution to the problem, Magee came up with the Park-o-Meter. The first working model went on public display in early May 1935, inspiring immediate debate over the pros and cons of coin-regulated parking. Indignant opponents of the meters considered paying for parking un-American, as it forced drivers to pay what amounted to a tax on their cars, depriving them of their money without due process of law.

Despite such opposition, the first meters were installed by the Dual Parking Meter Company beginning in July 1935; they cost a nickel an hour, and were placed at 20-foot intervals along the curb that corresponded to spaces painted on the pavement. Magee’s invention caught on quickly: Retailers loved the meters, as they encouraged a quick turnover of cars–and potential customers–and drivers were forced to accept them as a practical necessity for regulating parking. By the early 1940s, there were more than 140,000 parking meters operating in the United States.

Weekly Focus

Life is a successions of lessons which must be lived to be understood.

Ralph Waldo Emerson, Essayist

Believe you can, and you are halfway there.

Theodore Roosevelt, 26th President of the United States