Week of July 8th, 2024

Key Points for the Week

• July has been the best month of the year, over the last 20 years,for the stock market.
• The economy added 206,000 jobs in June, ahead of expectations of 190,000.
• The unemployment rate has been creeping higher.
• The labor market remains healthy.

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

Enthusiasm for artificial intelligence (AI), optimism about inflation, and expectations that the United States Federal Reserve (Fed) will begin to lower rates this year have helped global and U.S. stock markets, overall, push higher in 2024. Share prices increased more slowly in the second quarter, though. Here is what happened:

• Off to a rocky start. Overall, stocks declined in April after inflation numbers came in higher than economists had expected. That sparked concern the Fed might leave rates higher for longer than many investors hoped.

“Markets had expected the Fed to start cutting interest rates in June with three reductions in total expected this year, but that shifted dramatically following the release [of the Consumer Price Index].”

↳Jeff Cox, CNBC

• Bounding ahead. U.S. stocks rallied in May and June as companies in the Standard & Poor’s (S&P) 500 Index reported strong earnings growth for the first quarter of 2024. Overall, earnings, which represent companies’ net profits, grew 6 percent, and 78 percent of S&P 500 companies were more profitable than analysts had expected, according to John Butters of FactSet.

Investor optimism also was bolstered by May inflation data that showed inflation was headed in the right direction – lower.

“Bond markets recovered in the second quarter, boosted by improving inflation and a firmer, more confident outlook for rate cuts.”

↳Sarah Hansen, Morningstar

• Inspired by AI. Most of the top performing stocks in the S&P 500, to-date, have been technology companies, which are reaping the benefits of strong corporate spending on AI, reported Iuri Struta of S&P Global Market Intelligence in late June. However, technology companies may not deliver the results share price valuations suggest investors expect anytime soon.

“…for AI to fulfill its potential, firms everywhere need to buy the technology, shape it to their needs and become more productive as a result. Investors have added more than $2trn to the market value of the five big tech firms in the past year—in effect projecting an extra $300bn-400bn in annual revenues according to our rough estimates…For now, though, the tech titans are miles from such results.”

↳The Economist

• Looking for the way down. The Fed anticipates zero to two rate cuts this year. While many central banks around the world already have begun lowering rates, the Fed has yet to act. Last week’s employment report suggested the economy might be losing steam, and that could lead to the first Fed rate cut. The report indicated employers added more jobs than expected, but fewer than were added in the previous month.

“The path toward a rate cut in September is far from certain, but Friday’s data provided more evidence that the U.S. labor market is losing steam…It’s worth remembering that the other half of the Fed’s dual mandate is maximum employment, and weakening labor conditions have certainly prompted central banks to cut rates in the past.”

↳Megan Leonhardt, Barron’s

And, of course, tech stocks were champions as the dot-com boom peaked in 2000, the period to which the Magnificent Seven era is most often compared. What’s striking is that Microsoft is the only repeater among techs from that past bubble. Nowhere near the top currently are erstwhile dot-com champions Cisco Systems and Intel, while two of today’s Mag Seven, Apple and Nvidia, would have been classified as mid-caps in the bubble years.

Even more striking is that some Mag Seven members did not exist or were mere babies during the dot-com boom. Alphabet’s Google search engine and Meta Platforms’ Facebook did not exist, and Amazon.com was just a seller of books and compact discs, while its AWS cloud services unit was years away.

As in past epochs, most of today’s Magnificent Seven are being powered by the promise of the future—most recently, of course, around artificial intelligence. As Arnott observed in an interview this past week, markets have been correct in assessing the potential for technologies, but that often did not pay off for the popular stocks of the period.

The internet’s actual transformation was more profound than imagined during the peak of the dot-com stock craze, and many of the big names of the time are now amusing footnotes. Palm was spun out of 3Com, and its PalmPilot was for a time the must-have device, Arnott recalled, until the BlackBerry became ubiquitous among business users early in the century. That is, until the iPhone came along.

The lesson is that today’s market champions do not often dominate the future. Some future winners may not even exist yet or, especially these days, be publicly traded. The risk, then, is that the biggest stocks in cap weighted indexes such as the S&P 500 get bid up, both because of bullishness about future prospects and due to the mechanics of indexation. Passive index investors necessarily funnel the most money to the most overvalued stocks.

This Week in the Markets

After strong gains in May, the S&P 500 had another very solid month in the usually weak month of June.

The worst day in June for the S&P 500 was a 0.4% decline on the last day of the month. That is the best ‘worst day of the month’ since November 2019 and second best since February 2017.

The S&P 500 has not had a 2% daily decline since February 2023. Although this could suggest there may be some upcoming volatility, the below chart shows that there have been some streaks that have lasted much longer.

Something else to consider is stocks rarely peak for the year in June. In fact, since 1950 it has never happened.

In the month of July, the S&P 500 has been up an incredible nine years in a row and 11 of the past 12 years. That might sound like a lot, but it was up 11 years in a row from 1949 to ’59 and it had eight in a row back in the 1930s and ‘40s. Long win streaks apparently are quite normal for the month. In fact, in the past 10 years July is the second best month on average, with only November better.

Things have been even better the last 20 years, with July the S&P 500’s strongest month gaining an average of 2.3%.

Summer rallies in election years are quite common.

Employment

Despite the recent concerns, payroll growth has been running strong month after month. The economy created 206,000 jobs last month, above expectations for a 190,000 increase. These numbers can and will be revised, and so it helps to look at the 3-month average. That number has been trending down since earlier this year, but it is at a healthy 177,000 right now, above the 166,000 average pace in 2019.

The payroll growth numbers quoted above are “net employment numbers,” i.e. overall hiring net of separations, whether voluntary (people quitting jobs) or involuntary (layoffs). Breaking it down, overall hiring has eased. It is now running around 5.8 million, which matches the 2019 average. However, the labor force is much larger, and hiring as a percent of overall employment is currently at 3.6%. That is below the 2019 average of 3.9% and matches what we saw all the way back in 2014. Not exactly weak (the hiring rate collapsed below 3% during the 2008-2009 recession), but not too hot either. In other words, it is not easy to find a job if you are looking for one right now, a very different situation from what we saw in 2021/2022 through early 2023.

At the same time, “net employment” is high because separations are low. People are quitting their jobs at a much slower pace than before – the “quit rate” has been unchanged at 2.2% for 7 months now. That is only slightly lower than what we saw in 2019 and is indicative of a healthy employment situation. If the labor market were weak, the quit rate would be much lower. Even better, layoffs are running historically low. As a percent of the employed workforce, the “layoff rate” is at 1%. It averaged 1.2% in 2019, which was considered low.

What is likely happening is that companies did a lot of hiring in 2021/2022 (maybe too much) and are now easing up. If companies were truly pessimistic about sales and profits, they would be letting more people go. One positive aspect of this is that workers who stay in their jobs longer get more productive.

The other side of all this is that we are seeing the unemployment rate inch higher and that is the most visible sign that the labor market is cooling. The unemployment rate rose to 4.1% in June, up from 3.7% a year ago. That is still relatively low, but the recent uptrend is not encouraging. Now, part of this is because people who do not have jobs are looking for work more actively than they did before.

Rather than the unemployment rate, we prefer looking at the “prime-age” (25-54 years) employment-population ratio, since it gets around definitional issues that crop up with the unemployment rate (someone is counted as being “unemployed” only if they are “actively looking for a job”) or demographics (an aging population has more people retiring and leaving the labor force every day). The prime-age employment population ratio was unchanged at 80.8% in May. That is only slightly below the high from last summer, and above anything we saw between 2001 and 2019 (when it peaked at 80.4%). This by itself should tell you the labor market is strong, with more people participating in it.

The upshot of all those numbers is that the labor market remains healthy, but risks are rising. Once the labor market really starts to weaken, you can get a snowball effect, and it is hard to tell when it stops. The three recessions prior to the pandemic recession (1991, 2001, 2008-2009) were all bad from an employment perspective, as it took years for the labor market to recover. Once the labor market starts to weaken, the economy gets into a negative feedback loop of low hiring, high layoffs, weak income growth, and falling consumption. At the end of the day, one person’s spending is another person’s income, or company profits. These down cycles can adversely impact the productive capacity of the economy in future years.

Fed Chair Powell recently admitted that the risks to their double mandate low and stable inflation and stable employment – are now two-sided. He noted that cutting rates too soon could “undo the good work we’ve done bringing down inflation,” but, cutting rates too late “could unnecessarily undermine the expansion.” This two-sided view of the risks is a big change from a year ago.

Powell and other Fed members continue to maintain that they need to gain more confidence that inflation is headed back to their target of 2%. Yet, recent reports have been very encouraging on that front. Inflation is running around 2.5-3% only because of how the government calculates shelter inflation, which lags real-time, private market data.

The Fed may have enough data to justify starting their rate cut cycle as early as their July meeting in three weeks. However, given their proclivity to waiting, it looks like we may to wait until September.

How Do You Measure Wealth?

When sorting countries into “rich” and “poor” categories, economists often look at gross domestic product or GDP, which measures the amount of goods and services a country produces over a specific period. Using this measure, the United States is at the top of the heap with China in second place.

There are other ways to measure a country’s wealth, too. These include:

• Income per person (in U.S. dollars),
• Income per person, adjusted for local prices (aka purchasing power parity), and
• Income adjusted for prices and hours worked.

The United States is not the world’s leader by any of these measures, according to calculations completed by The Economist. Here is how the U.S. placed:

• Income per person (in U.S. dollars): 6th
• Income per person, adjusted for local prices: 9th
• Income adjusted for prices and hours worked: 10th

China’s standing also was much lower when these measures were used. It ranked 69th in income per person, 75th when income per person was adjusted for local prices, and 97th when price-adjusted income was measured by hours worked.

So, who were the economic leaders?

Luxembourg took the gold in income per person (in U.S. dollars) and income per person adjusted for prices. When income was adjusted for prices and hours worked, Norway was the world leader.

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 8, 1951: Paris Celebrates 2,000th Birthday

On July 8, 1951, Paris, the capital city of France, celebrated turning 2,000 years old. In fact, a few more candles would have technically been required on the birthday cake, as the City of Lights was most likely founded around 250 B.C.

The history of Paris can be traced back to a Gallic tribe known as the Parisii, who sometime around 250 B.C. settled an island (known today as Ile de la Cite) in the Seine River, which runs through present-day Paris. By 52 B.C., Julius Caesar and the Romans had taken over the area, which eventually became Christianized and known as Lutetia, Latin for “midwater dwelling.” The settlement later spread to both the left and right banks of the Seine and the name Lutetia was replaced with “Paris.” In 987 A.D., Paris became the capital of France. As the city grew, the Left Bank earned a reputation as the intellectual district while the Right Bank became known for business.

Today, Paris is home to some 2 million residents, with an additional 10 million people living in the surrounding metropolitan area. The city retains its reputation as a center for food, fashion, commerce, and culture. Paris also continues to be one of the world’s most popular tourist destinations, renowned for such sights as the Eiffel Tower (built in 1889 to commemorate the 100th anniversary of the French Revolution), the Arc de Triomphe, the Champs-Elysees, Notre Dame Cathedral (built in 1163), Luxembourg Gardens and the Louvre Museum, home to Leonardo da Vinci’s painting “Mona Lisa.”

Weekly Focus

Technology is anything that was invented after you were born; everything else is just stuff.

Alan Key, Computer Scientist

Attitude is a little thing that makes a big difference.

Winston Churchill, Former Prime Minister of the United Kingdom