Week of May 13th, 2024

Key Points for the Week

• The S&P 500 advanced for the third consecutive week, approaching an all-time high.
• Economic data remains supportive for the stock market.
• Strong starts to the year are bullish signals, and this bull market is young by historical measures.
• Earnings and profit margins remain strong.
• Inflation continues to normalize running at or near historical averages but above the Fed’s target of 2%.

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, Federal Reserve officials spoke about keeping the federal funds rate higher until it becomes clear that inflation will reach the Fed’s two percent target rate.

While people typically do not mind earning more interest on their saving and investment accounts, higher rates are painful for consumers. That pain is why higher rates help lower inflation. They discourage borrowing and cause people to buy fewer goods. Lower demand for goods and services should lead to lower inflation, reported Trina Paul of CNBC.

So far, the biggest fly in the inflation-reduction ointment is housing.

“In the first two decades of the 21st century, the U.S. built 5.5 million fewer homes than were needed, the National Association of Realtors estimated in a 2021 report…The effects of that housing shortage are rippling through the economy, most obviously in the form of soaring home prices…official inflation rates, which are designed to measure the cost of living, are highly sensitive to any changes in housing costs. Housing costs make up 45% of the Consumer Price Index (CPI), the most widely watched measure of inflation.”

↳Diccon Hyatt, Investopedia

May data show consumers are feeling discouraged.

The University of Michigan’s Index of Consumer Sentiment dropped 13 percent from April to May. “[The] decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups…They expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead.”

↳Joanne Hsu, Surveys of Consumers Director

While consumer sentiment dragged on markets, first quarter corporate earnings reports were stronger than expected, which lifted U.S. stocks. “With well over 80% of the S&P 500 having reported results, companies are on track to have increased earnings by 7.8%, well ahead of the April expectation of 5.1% growth.”

↳Lewis Krauskopf, Reuters

Declining sentiment caused U.S. stocks to stumble on Friday; however, major indices finished the week higher. Yields on many maturities of U.S. Treasuries moved higher over the week.

This Week in the Markets

A couple of softer-than-expected economic report cards recently came in — first quarter GDP growth and the April payroll report — and suddenly, calls for an impending recession have resumed. In fact, the combination of these reports with hotter-than-expected inflation in the first quarter, has raised chatter about the stagflation scenario of low growth and high inflation.

Stagflation is typically accompanied by high unemployment rates, whereas the unemployment rate has been below 4% for 27 straight months, the longest streak since the 1960s. Also, a stagflation environment is one where inflation is running in the high single digits, if not higher. While first- quarter inflation was hotter than expected, headline inflation was up 2.7% (using the Fed’s preferred personal consumption expenditures metric) through March. A year ago, it was up 4.4%.

We are not currently in a recession. The “soft” GDP number hid underlying strength, as most of the weakness was in the numbers that tend not to persist, and the payroll report was positive even if it missed expectations.

The Stock Market

The S&P 500 recently underwent a correction after a five-month win streak. This was after many bears had turned bullish. With that kind of setup, it makes sense that some volatility was necessary to shake the tree. Even though the S&P 500 pulled back just more than 5%, many of the former highfliers saw much larger corrections.

This Bull Market Is Still Young

The current bull market started in October 2022, which means it is now just less than 19 months old. If it ended now, it would be the shortest bull market ever. Most bull markets last much longer. The last 12 bull markets have averaged more than five years. Taking this a step further, many bull markets started in the so-called “bear market killer” month of October (this one included), and those bull markets have lasted even longer.

Stocks Like a President Up for Reelection

The last 10 times a president was up for reelection stocks finished the year higher.

A surprise summer rally is normal when the president is up for reelection.

It is All About Earnings

Earnings drive long-term stock gains, and the current backdrop continues to appear strong. The still-healthy consumer, strong labor market, potential for lower rates boosting the housing market, and improving manufacturing all suggest an economy that could surprise to the upside for the rest of 2024. Nominal GDP came in near 6% last year for one of the best years in recent memory, but the stage is set for similar growth this year. Remember, nominal GDP growth leads to profit growth, and profits matter to stock prices.

S&P 500 first-quarter earnings are up more than 5.0% currently, from 3.2% expected at the start of the quarter, according to FactSet. This would be the best earnings growth in nearly two years, while revenue is higher for the 14th quarter in a row.

Corporate profits for the S&P 500 are expected to hit an all-time high this year, with a gain of close to 11%. Periods of strong productivity, such as we are seeing now, tend to come in better than expected. The mid-to-late ‘90s saw strong productivity and consistently better-than-expected earnings and GDP. It was the last decade, when productivity was low, that GDP consistently disappointed by growing at 2%.

Many analysts are coming in low with earnings estimates, as they are still skeptical of this recovery. Looking out a year, forward 12-month S&P 500 earnings have soared from $243 at the start of the year to $254 currently. When companies post record profits, stock prices tend to follow suit.

Profit Margins and CAPEX Continue to Improve

Related to earnings is profit margins, and stronger profit margins could be another reason to expect a stronger economy and bull market. While profit margins are improving due to cost-cutting, this will likely create a leaner and more agile corporate America the second half of this year.

While many have predicted profit margins have only one way to go — lower — the opposite continues to happen. Improving profits and profit margins supported by continued economic growth next year would provide a strong tailwind for equities.

Higher capital expenditures (CAPEX) are another positive. In fact, forward 12-month CAPEX is at an all-time high. Companies investing in themselves should lead to continued stronger productivity growth, which will likely help economic growth exceed expectations.

Improvement on the Inflation Front

Lastly, and maybe most importantly, inflation has improved over the past year. However, the last few months have shown that the path lower will have some bumps. Inflation may continue to improve, and the blip from earlier this year was a result of seasonal quirks and outliers, such as rising auto insurance and financial services fees, that may not persist.

Rents are falling in the private data, which gives a good estimate of prices for new or renewed leases. The rental price for a lease today is likely less than a similar lease over the last couple of years, but that has yet to flow to the government’s data, which includes all rents and shelter, even rent attributed to homeowners. Shelter makes up more than 40% of the core Consumer Price Index (CPI), so any improvement here will quickly influence CPI data. But while we are waiting for overall rents to catch up with changes in asking prices seen in private data, such as from Apartment List and Zillow, it is important to remember that if shelter is removed from CPI, inflation is running close to the Fed’s 2% target level.

Some investors are concerned about higher wages impacting inflation, but we expect improvements over the coming months and quarters. The recent JOLTS data showed a healthy but normalizing labor market as wage growth slows. Similarly, the Indeed Wage Tracker showed slowing wage growth. In the high inflation period of the 1970s, wage growth was up around 9%, which flowed through to overall inflation. Currently, wage growth is solid but more in the pre-pandemic range.

This is significant, as it sets the stage for the Fed to eventually cut interest rates. We started the year with markets anticipating six to seven interest rate cuts, but expectations then fell to one cut (with some calling for a hike). We believe that the Fed will be patient and wait until they are confident that inflation has stabilized at an acceptable rate. It is possible that the Fed may accept a rate slightly higher than their target, if the economy shows signs of stalling.

We are aware of potential risks for the bull market. They will always be there, and we will continue to monitor them carefully. The current evidence still points to continued strength despite the April market weakness. In fact, that kind of occasional weakness is an important part of a healthy market.

Data Privacy Will Vary

For decades, companies have plundered the digital world for valuable treasure – information about you. When it comes to controlling how personal data are used, some people are better protected than others. It often depends on where you live.

For example, in 2016, the European Union (EU) adopted its General Data Protection Regulation (GDPR). The law is built on the idea that individuals have the right to own their personal information and decide who can use it, reported Fredric Bellamy of Reuters.

In contrast, federal law in the U.S. allows businesses and organizations to collect personal data without the express consent of the people whose information is being collected. The government may step in to prevent or mitigate harm to the individual in certain sectors.

In addition to choosing the type of data websites may collect, consumers can consult the free buyer’s guide created by a software firm’s foundation. The guide, called Privacy Not Included, rates the privacy and security of connected toys, gadgets, and smart products. Among the many groups that have earned a warning label in the buyer’s guide are:

• Dating apps. Most dating apps (80%) may share or sell your personal information for advertising…It is a bit strange because…apps work on a subscription model. With dating apps, it is not your money or your privacy. It is often both. We also could not confirm whether half (52%) of the apps do the bare minimum to keep all your personal information safe, by meeting our Minimum Security Standards, reported Jen Caltrider, Misha Rykov and Zoë MacDonald.
• Automobile companies. Car makers have been bragging about their cars being ‘computers on wheels’ for years to promote their advanced features. However, the conversation about what driving a computer means for its occupants' privacy has not really caught up… (car brands) can collect personal information from how you interact with your car, the connected services you use in your car, the car’s app (which provides a gateway to information on your phone), and can gather even more information about you from third party sources. One company sold personal driving data to brokers who used the information to formulate “risk scores.” The scores were then sold to insurance companies, causing some drivers’ premiums to increase significantly.

Some states have stepped in to provide additional protections for their residents. In March of 2024, there were 15 states that have comprehensive data privacy laws in place. Those states are California, Virginia, Connecticut, Colorado, Utah, Iowa, Indiana, Tennessee, Oregon, Montana, Texas, Delaware, Florida, New Jersey, and New Hampshire.

In April, federal lawmakers proposed a law, the American Privacy Rights Act, that could give consumers control over how their information is used by companies that collect it, as well as the right to opt out of certain types of data collection, reported Cristiano Lima-Strong of The Washington Post.

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

May 14, 1973: America’s First Space Station, Skylab, is Launched

On May 14, 1973, Skylab, America’s first space station, was successfully launched into an orbit around the Earth. Eleven days later, U.S. astronauts Charles Conrad, Joseph Kerwin, and Paul Weitz made a rendezvous with Skylab, repairing a jammed solar panel and conducting scientific experiments during their 28-day stay aboard the space station.

The first manned Skylab mission came two years after the Soviet Union launched Salyut, the world’s first space station into orbit around the Earth. However, unlike the ill-fated Salyut, which was plagued with problems, the American space station was a great success, safely housing three separate three-man crews for extended periods of time and exceeding pre-mission plans for scientific study.

The crews of Skylab spent more than 700 hours observing the sun and brought home more than 175,000 solar pictures. They also provided important information about the biological effects of living in space for prolonged periods of time. Five years after the last Skylab mission, the space station’s orbit began to deteriorate faster than expected, owing to unexpectedly high sunspot activity. On July 11, 1979, the parts of the space station that did not burn up in the atmosphere came crashing down on Australia and into the Indian Ocean. No one was injured.

Weekly Focus

You know you have reached middle age when you are cautioned to slow down by your doctor, instead of by the police.

Joan Rivers, American Comedian and Actress

Each time you write a page, you are a writer. Each time you practice the violin, you are a musician. Each time you start a workout, you are an athlete.

James Clear, American Author and Motivational Speaker