May Economic Update
Market Summary
Last month, the equity markets had a pullback on concerns about weakening consumer confidence, rising inflation, and a Federal Reserve who is becoming increasingly reluctant to cut interest rates, although as of this writing, over half of these losses have been retraced. For the month of April, the broad-based S&P 500 index contracted -3.97%, the Nasdaq 100 Index retreated -4.66% gain, and the small cap Russell 2000 index had lost -6.13%. (1)
Sticky Inflation Concerns Continue
On April 25, the Core Personal Expenditure (PCE) index, which is the Federal Reserve’s primary inflation indicator, came in much higher than expected with inflation rising to 3.70% which is the largest increase since August 2021. US labor costs also rose significantly with both the Employment Cost Index and Employment Wages Index rising the most in a year. Manufacturing prices also continued their upward trend since mid-2023 with ISM data coming in higher than expected. (2,3,4)
Federal Reserve Hangs Tight
Given the forementioned, it came as no surprise when the Federal Reserve announced they would not lower interest rates any time soon and will remain cautious with considering any rates cuts until inflation data begins to move back in the right direction. Fed Chair Jerome Powell stated, “it is likely that gaining greater confidence will take longer than previously expected” adding that, “so far this year, inflation readings have not given us that greater confidence.”
Consumer Confidence Weakens
Higher interest rates and inflation are beginning to show some strains with US consumer confidence to open up their wallets. Recent bi-weekly surveys from the University of Michigan showed steep in both consumer expectations, consumer confidence, and consumer sentiment. The Conference Board (CB) Consumer Confidence index also posted the lowest level in nearly two years. (6,7)
Corporate America also has been feeling the consumer squeeze lately with discretionary spending companies such as McDonalds, Starbucks, and Home Depot all mentioning drops in consumer confidence as inflation, credit card balances, and high interest rates are forcing spenders to tighten their belts. (8)
Looking Forward…
We appear to be entering a bifurcated macroeconomic environment. While tech corporate earnings met expectations, consumer-sensitive companies are beginning to feel the impacts of inflation and high interest rates. The job market remains relatively strong with unemployment remaining low, but those who have lost their jobs are having an increasingly difficult time finding new work leading to continuing jobless claims rising. Equity markets remain near their recent highs while recent earnings reports and high interest rates continue to raise eyebrows to justify current valuations.
About 80% of the US economy is driven by consumer spending. In our opinion, the recent consumer trends will be near the top of our watchlist to gauge the future strength of this market as we head into the summer months.
Monthly Financial Tip:
Flexible spending accounts (FSA’s) let you use pre-tax dollars to pay for everything from dependent care to out-of-pocket medical costs, helping you to save some money.
Citations:
1. WSJ.com, April 30, 2024
2. Investing.com, April 26, 2024
3. CNBC.com, April 30, 2024
4. Investing.com, May 01, 2024
5. CNBC.com, May 01, 2024
6. Investing.com, April 26, 2024
7. Axios.com, April 30, 2024
8. CNBC.com, April 30 & May 14, 2024
Disclaimers:
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Commentaires