Week of July 1st, 2024

Key Points for the Week

• The Supreme Court handed down a significant pro-business decision last week that may have a bigger long-term impact than the presidential debate.
• Market reaction to the debate real time was positive.

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

Last week was a mixed bag as investors weighed positive economic news against concerns that stock prices for some chipmakers may not be too high. Here are the highlights:

• Inflation slowed to zero.

On Friday, one of the Fed’s favored measures of inflation – the Personal Consumption Expenditures (PCE) Index – showed that headline inflation was flat in May. Both headline inflation and core inflation, which excludes volatile food and energy prices, were up 2.6 percent year over year. That is a significant improvement from May 2023 when headline inflation was 3.8 percent year over year, and core inflation was 4.6 percent . The Fed’s target is 2.0 percent.

Falling inflation bolsters the case for lower interest rates later this year or in 2025.

“Household spending rebounded after a pullback in April, and incomes showed solid growth, offering some hope that price pressures can be tamed without lasting damage to consumers.”

↳Augusta Saraiva, Bloomberg

• The banks are alright.

Every year, the Federal Reserve (Fed) conducts a stress test to see whether “large banks* are sufficiently capitalized and able to lend to households and businesses even in a severe recession. They evaluate the financial resilience of banks by estimating losses, revenues, expenses, and resulting capital levels under hypothetical economic conditions.”

Last week, the Fed released its report, and all the banks tested – 31 of them – passed. Each bank was able to absorb losses in highly stressful hypothetical scenarios while maintaining its minimum capital requirements.

• AI stocks were up and down.

Investors have high expectations for artificial intelligence (AI) chipmakers. As a result, share prices for many chip companies have dramatically increased in value over the past year. Last week, we saw some volatility. A leader in the category experienced a correction, which is a decline of at least 10 percent, before rebounding, reported Charlotte Yang and Yoolim Lee of Bloomberg.

In addition, we saw the stock price of a company that makes computer memory chips drop after it reported earnings last week. The company’s “shares had more than doubled in the year prior to its Wednesday report, but — even with an outlook roughly in line with the average of analyst estimates — the company was punished for not outperforming elevated expectations.”

Last week, major stock market indices delivered a mixed performance.

“The Dow rose 3.8% in the first half of the year."

↳Connor Smith, Barron’s

Yields on longer maturities of U.S. Treasury bonds moved higher over the week.

As investors debate the future of AI and the companies involved, we are reminded of the internet craze from the 1990s when Dot.com was the next evolution in technology. The introduction and acceptance of the internet spawned a new generation or products and improved the lives of millions of people. We believe that AI has the same potential to improve the lives of millions. Many companies were winners from the internet transition, but we need to be mindful of the companies that failed, including WorldCom and Global Crossing.

This Week in the Markets

The S&P 500, Down and tech-heavy NASDAQ were up for the first half of the year. Be aware that none of these important indexes topped the first six months from last year. Digging in more, the Russell 2000 small cap index was up slightly, while many of the “Magnificent 7” large cap tech- oriented names continued to sport impressive gains.

According to Howard Silverblatt at S&P, if you removed NVIDIA’s gains from the S&P 500, the S&P 500 would be up 10.7% and if you removed all the Magnificent 7 companies from the S&P 500, the S&P 500 would be up 6.3%.

What stands out? The persistent number of new highs for starters. Remember, all of 2022 and 2023 the S&P 500 made a grand total of one new all-time high. It has 31 the first six months of this year, which is second only to 2021 this millennium.

What does a lot of new highs mean? When the S&P 500 had 20 or more all-time highs at the midpoint, the rest of the year has always had at least one more new high and it averaged another 20 new highs the second half of the year. Turning to returns, the median rest-of-year return was a very impressive 9.6%, well above the median return for all years of 5.6%.

Lastly, turning to price returns, when the S&P 500 was up double digits at the midpoint of the year, the second half of the year again does better than most years. In fact, the full year has never been lower, with an average gain of 25% for the entire year. Still, the final six months have had a very impressive median gain of 9.8%, well above the returns from all years, and have been higher nearly 83% of the time.

The Presidential Debate

The first (and possibly only) presidential debate of the cycle, which took place last Thursday, is now in the rearview mirror and it is still hard to gauge what the fallout will be when all is said and done. Two things to keep in mind: First, anyone who views the debate strictly from a policy perspective is going to think the candidate who represents their policy preferences won. Second, debates rarely have an impact on elections. But rarely does not mean never and a few debates have had a meaningful impact. (1960 and 1980 are the most often cited.)

Even if debates usually have little impact, we have a nearly evenly divided electorate and this is likely to be another close election. In our opinion the balance of power in the Senate will be more consequential than who wins the White House.

How May I Help You?

During the 20 th century, manufacturing drove economic growth in many countries. As Japan recovered from the devastation of World War II, it produced inexpensive goods that carried the label, “Made in Japan.” As wages rose, manufacturers moved production and the labels on low-cost goods changed to “Made in China,” “Made in Vietnam,” and “Made in India,” among other places.

The Economist cited Harvard Professor Dani Rodrik, explaining that manufacturing boosted economic development for three primary reasons. It helped less developed countries:

• Produce goods that could be sold in global markets.
• Improve productivity through technological advancement.
• Create jobs by putting unskilled laborers to work.

As manufacturing has become more capital intensive, we have begun to see a change. Instead of pursuing manufacturing, emerging countries are now outsourcing services. Recently, an example of this type of cross-border commerce went viral when a social media post showed a cashier at a Japanese fried chicken joint in New York City working via screen from the Philippines.

“The importance of services is growing in part because they are gaining some of the attributes of manufacturing. Start with cross-border commerce. Trade in services reached nearly $8 [trillion] last year, up 60% from a decade ago. Trade in manufacturing is three times bigger—but only grew 25% over this period.”

↳Arjun Ramani and Mike Bird, The Economist

The sophistication of outsourced services varies. For instance, “The Philippines is a giant when it comes to all kinds of outsourced back-office business. Ghana is Africa’s IT hub. Turkey is known for health tourism…”

Only time will tell whether service exports can improve standards of living in emerging countries as manufacturing does.

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 2, 1977: “Gonna Fly Now (Theme from Rocky’)” is #1 Song on U.S. Pop Charts

On July 2, 1977, Hollywood composer Bill Conti scored a #1 pop hit with the single “Gonna Fly Now (Theme from Rocky).”

Bill Conti was a relative unknown in Hollywood when he began work on Rocky, but so was Sylvester Stallone. Conti had gained some attention internationally with his work on several early 1970s Italian films, including Vittorio de Sica’s Academy Award-winning Il Giardino dei Finzi-Contini, and Stallone had starred in a small film called Lords of Flatbush and played various minor roles in movies and on TV. It was Rocky that would truly launch both men’s careers, though. The film was Stallone’s from start to finish, but it is difficult to overstate the importance of his collaboration with Conti. Though Conti took his inspiration from Stallone’s footage, Stallone had the film’s critical training and fight sequences edited to fit Conti’s music, and the interaction between picture and music in Rocky made an enormous contribution to the movie’s success.

The single “Gonna Fly Now” takes its name from the almost-superfluous 30 words of lyrics written by Ayn Robbins and former Teddy Bear Carol Connors. Though it lost the competition for Best Original Song at the 49th Annual Academy Awards to Barbra Streisand and Paul Williams’ “Evergreen (Love Theme from A Star Is Born),” it has remained an instantly recognizable piece of American pop culture. In the years since the release of Rocky, Sylvester Stallone has continued to churn out action flicks, and Bill Conti has built a hugely successful career as a composer for film and television—a career that eventually included an Academy Award for Best Original Score for the 1983 film The Right Stuff.

Weekly Focus

Either the United States will destroy ignorance or ignorance will destroy the United States.

W.E.B. Du Bois, Sociologist

The greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.

↳Stephen Hawking, Theoretical Physicist