Week of May 6th, 2024

Key Points for the Week

• Stocks gained for the second week in a row, as strong earnings, a dovish Fed, and an acceptable job number sparked buying.
• The current bull market is young.
• The Fed is watching inflation carefully but considers rates restrictive enough, for now.

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

What will the Federal Reserve do?

Uncertainty about the direction and timing of Fed rate cuts is causing stock markets in the United States to charge and retreat. U.S. stocks rallied for five consecutive months (anticipating rate cuts early in 2024) before retreating in April after higher-than-anticipated inflation suggested the Fed might delay any rate reductions.

Markets retreated early last week on concerns the Fed might take a more hawkish tone following the Federal Open Market Committee (FOMC) meeting – but it did not. Following the meeting, the FOMC release stated:

“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective…The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

While the Fed left its rate policy unchanged, it eased a bit using a different policy lever.

“…[FOMC] policymakers gave a green light to slowing the pace at which the Fed is shrinking its Treasury holdings, which may modestly work against the rise in market interest rates.”

↳Jed Graham, Investor’s Business Daily

Markets found the Fed’s moderate tone encouraging, and optimism expanded after the U.S. employment report suggested the labor market might be cooling off.

“The indexes bounced back from early-week lows after the employment report revealed that the U.S. added fewer jobs than expected in April—but enough to indicate a still-growing economy. For now, that could help keep a lid on inflation, prevent the Federal Reserve from needing to raise rates again, and maybe even allow it to cut them.”

↳Jacob Sonenshine, Barron’s

Major U.S. stock indices finished the week higher, according to Barron’s. The U.S. Treasury market rallied, too. Yields on longer maturities of U.S. Treasuries moved lower over the week.

This Week in the Markets

The current bull market is less than 19 months old. Should this bull market end now, it would be the shortest and smallest bull market ever.

The average bull market lasts more than five years and gains 167% on average (with a median of more than 107%). So, it is likely that markets will continue to focus on the economic resilience and business resourcefulness that have been clearly demonstrated.

__ Powell and Fed Members Keep Their Eyes on the Big Picture__

The takeaway from the Federal Open Market Committee (FOMC) meeting is that inflation has eased considerably since last year but remains elevated. As a result, the Fed is maintaining policy rates where they are (in the 5.25 5.50% range). At the same time, Federal Reserve Chair Jerome Powell believes the disinflation process will continue, and so the next major move Fed members make will likely be to cut rates. However, that is not going to happen until they gain “greater confidence” (in their own words) that inflation is headed back to their 2% target.

There is no question that inflation ran hot in the first quarter, especially relative to the second half of 2023. From the chart below, it appears inflation progress has stalled, with the Fed’s preferred inflation metric, the Personal Consumption Expenditures Index (PCE), running at 2.5-3% since December. Core inflation, which strips out volatile food and energy components, has been going the wrong way. Over the last six months, core PCE has run at an annualized pace of 3.0%, and over the last three months it has been up to 4.4%.

It would be easy to view the data in the chart above and deduce that the inflation progress from the second half of 2023 has reversed. However, Powell and the Fed did not say this. Instead, they emphasized that inflation has eased significantly over the past year (six-month core PCE was running around 4.5% a year ago). However, inflation remains elevated relative to their 2% target. Hence the need to keep rates where they are.

The hot first-quarter inflation data also raised concerns about the stagflation scenario. However, Powell pushed back hard on this in his post meeting press conference, noting that stagflation is when unemployment is high (around 10%) and inflation is in the high single digits. That is not the situation now. The unemployment rate has been below 4% for 26 straight months, and headline PCE inflation has been in the range of 2.5-3%.

In fact, Powell added that the Fed expects inflation to continue to ease, mostly for two reasons:

• More supply-side improvements: This was behind the historic inflation drop in 2023, and the Fed believes more supply-related relief lies ahead.
• Policy rates: Policy rates are restrictive, but they need time to play out.

This is why Powell said the next move will likely be a rate cut, rather than a rate increase. The hurdle for a rate hike at this point is high. However, considering the first-quarter inflation data, it will take longer for the Fed to gain confidence that inflation is headed back to their 2% target, and the Fed would need that confidence to start cutting interest rates. The inflation data in January and February did not suggest inflation is headed higher. A lot of the so-called “heat” and “persistence” was due to idiosyncratic factors, such as housing inflation and auto insurance.

The overall inflation numbers, including for core inflation, can hide what is happening beneath the surface. It is clear how inflation broadened out in June 2022 relative to December 2019. Encouragingly, the distribution is narrowing once again. The picture for March 2024 looks closer to what it did in December 2019, rather than June 2022.

As the chart shows:

• In December 2019, just 10% of categories had inflation rates above 4% year over year.
• In June 2022, 58% of categories had inflation rates above 4%.
• In March 2024, 36% of categories had inflation rates above 4%.

This gets back to the big picture:

• We have made considerable progress on inflation over the last two years.
• Inflation remains elevated.

In fact, we even made progress on inflation in the first quarter. In December 2023, 42% of categories had inflation rates above 4%, versus 36% of categories in March. More progress would have been ideal, but the trend was moving in the right direction, which explains why the Fed is not panicking. It helps to focus on the big picture and the ultimate objective.

Of course, this means interest rates are likely to stay close to their peak rate for this cycle (5.25-5.50%), but continued progress on inflation means we could see one or two rate cuts in 2024, perhaps in September or December. Of course, this means the next few inflation reports take on outsized importance.

April Employment Report

The April employment report was the first one in months that went well against market expectations. Three blockbuster payroll reports in the first quarter of the year had conditioned sentiment toward expecting more of the same, but instead we got something more lackluster. Payrolls grew 175,000 in April — below expectations of 240,000 and lower than the red-hot Q1 monthly average of 269,000. This shifts the narrative from a no-landing scenario to soft landing, i.e., a steady economy with inflation falling, which would allow the Federal Reserve to cut interest rates.

Perhaps the best evidence is aggregate income growth across all workers in the economy. Ultimately, income growth drives consumption, and aggregate income growth is the sum of employment growth, wage growth, and the change in hours worked. Over the last three months(through April), overall income growth has grown at an annualized pace of 5.9%. That is strong and above the pre-pandemic pace of 4.7%.

In short, nothing in the employment data suggests an overheating economy that will keep inflation high and push the Fed to maintain policy rates as high as they are now (5.25-5.50%). If nothing else, this report makes the prospect of further rate increases even more unlikely, underlying what Powell said earlier this week, which the market cheered.

__ The Outlook for the Stock Market__

Aggregate incomes running close to a 6% annual pace suggests nominal GDP is also running at 5-6%. That environment is good for profit growth, which in turn is positive for stocks.

While payrolls came in well below expectations, 175,000 is above the 2019 monthly average of 166,000. Analyzing monthly job numbers requires caution because they can be revised. But over the last three months, payroll growth has averaged 242,000. The corresponding number exactly a year ago was 237,000. In other words, the labor market has remained strong, with not much acceleration or deceleration.

The unemployment rate did tick up from 3.8% to 3.9%, but April is the 27th month in a row in which the unemployment rate has clocked in below 4%. That is the longest streak since the 1960s. As mentioned previously, the prime-age (25-54 years) employment-population ratio gets around definitional issues that crop up with the unemployment rate (a person is counted as being unemployed only if they are “actively looking for a job”) or demographics (an aging population with more people retiring and leaving the labor force every day). The prime-age employment population ratio rose in April to 80.8% — that is only slightly below the high from last summer and above anything between 2001 and 2019, when it peaked at 80.4%. In fact, the prime-age employment population ratio for women just hit an all-time high of 75.5%. This by itself suggests the labor market is strong, as more people are participating in it.

A Strong Labor Market Is Good for Productivity Growth

A theme of our 2024 Outlook is a possible resurgence in productivity growth. Over the last year, productivity grew 2.9%. That is well above the 1.1% annualized pace between the first quarter of 2020 and the first quarter of 2023, or the 1.5% annual pace between 2005 and 2019.

A strong labor market incentivizes businesses to invest more, which is a key ingredient for productivity growth. Importantly, when productivity increases workers can see strong wage growth without necessarily pushing up inflation. Falling inflationary pressures can allow the Fed to ease interest rates. Even if rates are shifted lower by a relatively small degree, that can further boost investment and keep the productivity growth engine running. This is something that occurred in the mid-to-late 1990s. A similar situation bodes well for the economy and stocks.

Who Is Your Beneficiary?

Beneficiaries are the people who will inherit your assets –savings and investment accounts, life insurance policies, homes, cars, and other possessions. In general, there are two ways to name beneficiaries. You can:

• Designate a beneficiary on an account. For example, when you signed up for a retirement plan at work, you were probably asked to name a primary (and, sometimes, a secondary) beneficiary for the account. If you have life insurance or a health savings plan at work, you probably named beneficiaries for these accounts, too.
• Name an heir in your will. As part of the estate planning process, people write wills that indicate who should inherit various assets.

What many people do not understand is that designated beneficiaries trump wills.

“Wills are malleable documents, subject to interpretation from probate court and contestable by family members demonstrating an interest in your estate (even if you do not list them in your will). Conversely, your contract with a financial institution creates an unimpeachable beneficiary designation. The financial company and relevant laws ensure your beneficiary will receive payment, even if other family members try to claim the benefit.”

↳Ashley Kilroy, SmartAsset

It is important to review your financial accounts – life insurance policies, retirement plan accounts, health savings accounts, and investment and bank accounts – and confirm that the correct beneficiary is named.

If you have any questions or would like to review your current beneficiary designations or your estate plan, please let us know.

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.

Have You Filed?

The most recent version of the US Federal tax code (as of 4/12/23) totals 4,138,788 words. That is over five times longer than the King James Bible and more than seven times longer than War and Peace. Even the entire Harry Potter series comes in at just over a million words. (Source: National Taxpayers Union Foundation, Tax Foundation)

Stick to Email

On April 9 th , 2024, the US Postal Service filed notice to increase the price of a first-class stamp from 68 to 73 cents. It would be the 2nd increase this year and the 4th since the start of 2023. If approved, the price of a first-class stamp will have increased by 33% over the last 4 years. (Source: US Postal Service)

Secure That Internship

49% of male and 44% of female college graduates are still working at a below "college-level" job ten years after graduation. Graduates who complete an internship are 49% less likely to become underemployed after graduation than those who did not. (Source: Strada Education Foundation)

Did you Know? This Week in History

May 10, 1940: Winston Churchill Becomes Prime Minister of Britain

On May 10, 1940, Winston Churchill, First Lord of the Admiralty, was called to replace Neville Chamberlain as British prime minister following the latter’s resignation after losing a confidence vote in the House of Commons.

In 1938, Prime Minister Chamberlain signed the Munich Agreement with Nazi leader Adolf Hitler, giving the Sudetenland region of Czechoslovakia over to German conquest but bringing, as Chamberlain promised, “peace in our time.” In September 1939, that peace was shattered by Hitler’s invasion of Poland. Chamberlain declared war against Germany but during the next eight months showed himself to be ill-equipped for the daunting task of saving Europe from Nazi conquest. After British forces failed to prevent the German occupation of Norway in April 1940, Chamberlain lost the support of many members of his Conservative Party. On May 10, Hitler invaded the Low Countries—Belgium, Luxembourg, and the Netherlands—and France. The same day, Chamberlain formally lost the confidence of the House of Commons.

Churchill, who was known for his military leadership ability, was appointed British prime minister in his place. He formed an all-party coalition and quickly won the popular support of Britons. On May 13, in his first speech before the House of Commons, Prime Minister Churchill declared that “I have nothing to offer but blood, toil, tears, and sweat” and offered an outline of his bold plans for British resistance. In the first year of his administration, Britain stood alone against Nazi Germany, but Churchill promised his country and the world that the British people would “never surrender.” They never did.

Weekly Focus

A successful man is one who can lay a firm foundation with the bricks others have thrown at him.

David Brinkley, Newscaster

We cannot always build the future for our youth, but we can build our youth for the future.

Franklin D. Roosevelt, 32 nd President of the United States