Week of May 20th, 2024

Key Points for the Week

• Stocks hit new highs last week, with the Dow above 40,000 for the first time.
• Even in the face of recent stock gains, many well-known bears are back in the news.
• The Federal Reserve continues to see broad inflation progress despite the first-quarter increases.

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

Policymakers, central bankers, economists, and investors look at leading economic indicators to forecast where the economy may be headed. Classic leading indicators include:

Consumer confidence. Consumer spending is the largest contributor to economic growth in the United States. When consumers feel confident about their finances, the economy may continue to grow, and vice versa.

The slope of the yield curve. When yields for short-term U.S. Treasuries are higher than yields for long-term U.S. Treasuries, then a recession may be ahead.

“Yield curve inversions have preceded each of the last eight recessions.”

↳The Federal Reserve Bank of Cleveland

Stock market performance. Since investors make decisions based on how they believe the earnings of companies and the value of companies’ stocks will change over time, a rising or falling stock market is considered to offer insight to where the economy may be headed.

“The leading indicators for the U.S. economy fell in April for the second month in a row…The leading index declined mainly because of weaker business orders, fewer permits to build new homes and a decline in stock prices last month. Stocks have since rebounded, however, to fresh record highs. The economy slowed in the first quarter after heady growth in the second half of 2023. It is unlikely to speed up much until inflation tapers off and the Federal Reserve cuts interest rates.”

↳Jeffrey Bartash, MarketWatch

Some analysts believe rate cuts are still on the table for 2024, reported Sam Meredith of CNBC. Last week, the Consumer Price Index showed headline inflation (which measures price changes for a fixed basket of goods) and core inflation (which removes food and energy from the basket) both moved lower from March to April.

U.S. stocks finished the week higher with the Dow Jones Industrial Average closing above 40,000. Yields on most maturities of U.S. Treasuries moved lower over the week, lifting bond prices. Bond prices usually move in the opposite of interest rates.

This Week in the Markets

A major milestone was hit last week, as the Dow Jones Industrial Average closed above 40,000 for the first time. While there is not much difference between 40,000 and 39,999, it is quite significant from a psychological perspective.

While we cannot predict the future with certainty, we do know that stocks tend to trend higher, even amid bad news. For example, over the last seven years, which included a near-bear market in late 2018, a 100-year pandemic, a 34% bear market, supply chain disruptions, wars in Ukraine and the Middle East, generational inflation, the most aggressive Fed in 40 years, another 25% bear market in 2022, and soaring interest rates, the Dow climbed to over 40,000 points. Think about that the next time you read a scary headline or hear an economist predicting the worst.

What does the 40,000 mark mean? It is another reminder that when it comes to investing, patience is rewarded. Also, the Dow is not as tech-heavy as the NASDAQ or even the S&P 500, so it is another sign that areas such as industrials and financials are improving. That suggests the market’s strength is broadening out, exactly what is needed for a healthy, longer-lasting bull market.

In our research we found that this latest record was the 1,414th new all time high for the Dow since 1900. The average return one year after a new high is close to 7.8% with gains 70% of the time. That is a better record than the average year since 1900, which has been up 7.4% with gains 65% of the time. To repeat: The returns after a new high are slightly better than the average return.

Inflation

There is no question that the inflation data in the first quarter was higher than predicted, but as we have highlighted over the last several months, there were good reasons not to panic about another sustained upswing in inflation. It was reassuring to see that Fed officials took a similar view. As Fed Chair Jerome Powell noted after the Fed’s May meeting, Fed members did not think the hot inflation data negated the progress made in the second half of 2023. It did make them realize that achieving confidence in reaching their 2% inflation target would take longer than anticipated.

The April CPI report confirmed there was no need to panic after the hot inflation data in the first quarter. Headline inflation rose 0.3% in April, below expectations. On a year-over-year basis, CPI eased to 3.4%. That is still elevated, but as the chart below shows shelter inflation (dark green bars) is the main cause. When shelter is excluded, headline CPI has risen 2.2% since last April.

As we have written about, official shelter inflation runs with significant lags to current rental markets. Shelter inflation matters a lot for CPI, as it makes up 35% of the total. Rents of primary residences account for 8%, while “owners’ equivalent rent” (OER) accounts for 27%. OER is the “implied rent” homeowners pay, and it is based on market rents as opposed to home prices.

However, there’s good news with respect to shelter. Rents of primary residences rose at an annualized pace of 4.3% in April. That is the slowest pace since August 2021 and not far above the 2018-2019 average of 3.6%. OER remains elevated, but it is easing (albeit slowly). It rose at an annualized pace of 5.2% in April, below the first-quarter average of 5.9% but well above the 2018-2019 average of 3.2%. It is clear why OER is keeping CPI elevated.

Another example of post-pandemic catchup is auto insurance. Core CPI inflation, which excludes food and energy, was up 3.6% year over year in April. Of that, auto insurance accounted for 0.73%. Amazingly, auto insurance makes up just more than 3% of the core inflation basket of goods but accounted for about 20% of the year-over-year increase. That is because vehicle prices and repair costs surged after the pandemic, and insurance premiums rose as a result.

Combine the contribution from auto insurance (0.73%) to that from rents and OER (2.37%), and the three categories account for about 85% of the year-over-year increase in core inflation. Of course, this is all backward-looking because it is not capturing what is happening in real time or what is likely to happen going forward.

Encouragingly, several forward-looking indicators of underlying inflation do not offer any cause for concern, now.

• Wage growth for workers is running at the pre-pandemic pace of around 3%, which means there is no underlying demand-side pressure on inflation.
• Broad commodity prices are not surging like they did in 2022 (oil prices have fallen close to 10% since early April), which means a commodity-driven supply shock is not in the cards for now.
• Market-implied expectations for future inflation are consistent with the Fed’s 2% target and well off their 2022 peak.
• Consumer expectations for inflation are not far above where they were pre pandemic, and this should ease further as gas prices pull back, which has happened recently.
• Business expectations for inflation in the year ahead are running at 2.3%, which is also close to pre-pandemic levels.

An Inflation Bellwether Is Cause for Optimism

An inflation category of note is full-service seated restaurants (the official category is “full service meals and snacks”). It is technically not in the core CPI basket, but it has historically tracked core inflation closely. This is useful because full-service restaurant meals combine several demand- and supply-side elements that drive inflation, including:

• Commodity prices — food and energy (since food must be transported across the country)
• Wages — for restaurant workers
• Rents — for restaurant premises

Inflation for restaurant meals has eased significantly over the past year and a half. It peaked at 9% year over year in August 2022 but is now running at 3.4%. That is like the pace of 2019. The message is that underlying inflationary pressures are quite benign. The chart below shows that it is unusual for inflation of full-service meals (blue line) to run below core CPI inflation (green line), as is the case now, but that’s only because shelter inflation is elevated.

On Track for Interest Rate Cuts in 2024

As Powell recently reiterated, inflation data has yet to make Fed members confident that inflation is headed back to their 2% target, which means they may not cut rates at their June or even July meeting. The April inflation data was a step in the right direction, and the forward-looking data suggest continued improvement in the inflation data. This may allow the Fed to cut interest rates prior to yearend.

Markets clearly read optimism in the April CPI data. The one-year Treasury yield, which is a close proxy for policy rates over the following year, fell from 5.16% to 5.09% on the release day, and the S&P 500 rose more than 1% to a new record high. More positive movement is likely if inflation evolves as we expect over the next several months, keeping the bull market alive and well.

Impact of Inflation

While recent inflation data has shown encouraging signs of improvement, a recent study led by the Allianz Life Insurance Company of North America, determined that ongoing inflation has set back Americans’ ability to prepare for their financial futures by causing them to reduce savings, take on debt, and withdraw from retirement accounts.

• 69% of Americans have not been able to contribute as much to their savings due to ongoing inflation
• 51% have taken on more debt because of inflation
• 67% are more concerned about paying bills than about their financial future
• 42% have withdrawn funds from their retirement savings because of inflation
• 37% say they feel good about the direction inflation is heading, up from 31% from the last quarter

If you have questions about how inflation may impact your financial future, please contact us.

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 21, 1881: American Red Cross Founded

In Washington, D.C., humanitarians Clara Barton and Adolphus Solomons found the American National Red Cross, an organization established to provide humanitarian aid to victims of wars and natural disasters in congruence with the International Red Cross.

Barton, born in Massachusetts in 1821, worked with the sick and wounded during the American Civil War and became known as the “Angel of the Battlefield” for her tireless dedication. In 1865, President Abraham Lincoln commissioned her to search for lost prisoners of war, and with the extensive records she had compiled during the war she succeeded in identifying thousands of the Union dead at the Andersonville prisoner-of-war camp.

The American Red Cross received its first U.S. federal charter in 1900. Barton headed the organization into her 80s and died in 1912. Solomons served alongside her as vice president for 12 years.

Weekly Focus

A diamond earns its sparkle from the pressure it endures.

Matshona Dhliwayo, Author

Whatever you have just done is not nearly as important as what you are doing right now.

Mike Krzyzewski, Basketball Coach