Week of June 3rd, 2024

Key Points for the Week

• The S&P 500 fell slightly last week, but it was up in May.
• While June is historically a weak month for the stock market, it fares much better in election years and a strong May suggests strength in June, the rest of the year, and even over the next 12 months.
• The final inflation report for the month (PCE) confirmed we are not currently seeing a resurgence in inflation.

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

Overall, May was a good month for investors.

The adage, “Sell in May and go away,” would have been poor advice last month. Major stock indices in the United States finished the month higher. Despite the positive returns, May was also a volatile month for stocks as investors worried about inflation and whether the Federal Reserve will begin to lower rates in 2024, reported Paul La Monica of Barron’s.

For much of last week, stocks trended lower. The Conference Board’s Consumer Confidence Index surprised by exceeding economists’ expectations for May, but it had little effect on investors as the report was not rosy.

Confidence did improve.

“…amid optimism about the labor market, but worries about inflation persisted and many households expected higher interest rates over the next year…The mixed survey…also showed more consumers believed that the economy could slip into recession in the next 12 months.”

↳Lucia Mutikani, Reuters

Late in the week, markets regained lost ground after the Personal Consumption Expenditures Price Index (one of the Federal Reserve’s preferred inflation gauges) data arrived. The Index showed that core inflation, which excludes volatile food and energy prices, ticked lower from March to April. Headline inflation remained steady month to month.

Year to year, headline inflation was 2.7 percent in April and core inflation was 2.8 percent.

Major U.S. stock indices finished the week lower. The yield on the benchmark 10-year U.S. Treasury finished the week close to where it started the week.

This Week in the Markets

June historically is not a very good month for stocks, which makes mention of a ‘June Swoon’ quite common. In the past 20 years, only September has been worse, so could we see June weakness this year?

June tends to do quite well in election years. Election years do have their own typical patterns based on the build-up to the election and then the clarity that comes once it is behind us. When it comes to election years, the usually weak months of June and August tend to do quite well, with both up a very solid 1.3% on average. Meanwhile, the normally strong month of July is slightly weaker than normal in an election year. June has been the 11th  worst month the past 20 years, but the past 10 years it is the 5th best month and during an election year it is the 3 rd  best month.

Here is the same data, but focusing specifically on election years.

Inflation

We received our final piece of April inflation numbers last week with the April data for personal consumption expenditure inflation (PCE). While not as well-known as Consumer Price Index (CPI) inflation, PCE is the Federal Reserve’s preferred measure, for reasons discussed below.

Hotter-than-expected inflation data in the first quarter has led to a lot of concern that inflation may rear its ugly head again. A lot of the heat was due to idiosyncratic factors that could reverse as the year progresses. And the April PCE report released Friday confirmed that.

The Fed prefers PCE to CPI because it is 1) broader, with more categories, 2) dynamic, as underlying category weights can change as consumers shift spending patterns, and 3) can be revised. PCE has been coming in softer than CPI (the so-called “wedge”) – with headline PCE running at 2.7% year over year versus headline CPI at 3.4%. A big reason is that housing (which we have written and talked about, a lot) makes up over a third of CPI versus just 16% of PCE. Still, as you can see below, housing (dark green bar) is a big reason why even PCE remains above the Fed’s 2% target.

The impact of housing is even more pronounced if you look at core PCE inflation, which strips out the volatile energy and food components. Core PCE is up 2.75% trailing year, which is the slowest pace since April 2021. However, housing is adding 1.04 percentage points to that total.

Another way to counter the notion that we have not made any progress on inflation since last October is to look under the hood at the distribution of inflation across all categories. I looked at 178 items within core PCE and calculated the distribution of year-over-year inflation at three different times. You can see how inflation really broadened out in June 2022 relative to December 2019 because more categories were experiencing high inflation. The good news is that the distribution is narrowing once again. The picture for April 2024 looks closer to what it looked like in December 2019 than June 2022.

• In December 2019, just 10% of items had inflation rates above 4%.
• In June 2022, 58% of items had inflation rates above 4%.
• In April 2024, 33% of items had inflation rates above 4%.

Even if inflation remains elevated, we have made considerable progress on inflation over the last two years. In fact, we made some progress on inflation even in 2024. Back in December 2023, 42% of items had inflation rates above 4%, versus 33% in April. And 21% of items were experiencing falling prices in December 2023, versus 30% in April.

The improvement gets to why the Fed did not panic about the Q1 inflation data.

In fact, as we look ahead, we see disinflation in the pipeline. We are continuing to see disinflation for durable goods like vehicles, household furnishings, and appliances as well as grocery prices. The improving numbers can be seen both in official data and anecdotally. To take just one example, Walmart’s CEO recently said their prices are only up 0.4% year over year, and in several categories, prices are even falling.

The big picture is that the overall inflation outlook looks good, and that likely keeps the Fed on track to start cutting rates this year, perhaps in September, assuming we get a few more positive inflation reports. That would also be a big positive for equity markets, which, as discussed above, already have quite a bit of momentum and seasonality going for them.

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

June 3, 1965: First American Astronaut Walks in Space

On June 3, 1965, 120 miles above the Earth, Major Edward H. White II opened the hatch of the Gemini 4 and stepped out of the capsule, becoming the first American astronaut to walk in space. Attached to the craft by a 25-foot tether and controlling his movements with a hand-held oxygen jet-propulsion gun, White remained outside the capsule for just over 20 minutes. As a space walker, White had been preceded by Soviet cosmonaut Aleksei A. Leonov, who on March 18, 1965, was the first man ever to walk in space.

Implemented at the height of the space race, NASA’s Gemini program was the least famous of the three U.S.-manned space programs conducted during the 1960s. However, as an extension of Project Mercury, which put the first American in space in 1961, Gemini laid the groundwork for the more dramatic Apollo lunar missions, which began in 1968. 

The Gemini space flights were the first to involve multiple crews, and the extended duration of the missions provided valuable information about the biological effects of longer-term space travel. When the Gemini program ended in 1966, U.S. astronauts had also perfected rendezvous and docking manoeuvres with other orbiting vehicles, a skill that would be essential during the three-stage Apollo moon missions.

Weekly Focus

Despair is self-fulfilling. If we call something impossible, we act in such a way that we make it so. And I for one refuse to live that way.

Lesley Hazelton, Writer

Nations do not have allies, they have interests.

Lord Palmerston, English Statesman