Juncture Wealth Strategies - July 2024 Market Update
Economic & Market Forecast
- Economy
- Inflation
- Bond Markets
- Equity Markets
- Third & Fourth Quarter Predictions
Economy: Retail Sales
Retail sales, a measure of the consumers’ current propensity to spend, are still growing at a decent pace albeit slower than the previous two years.
Economy: Household debt levels
Since 2009, US households have significantly lowered their collective debt relative to GDP. As shown in the chart below, households have the lowest debt to GDP ratio over the past 10 years. This lower debt load allows the consumer flexibility in continuing to spend.
Economy: Real Disposable Income Growth
Real disposable income growth (income growth minus taxes, mandatory deductions and inflation) is beginning to regain part of the purchasing power lost over the past few years. Higher real disposable incomes provides consumers with the ability to continue spending. The chart below shows the annual growth in real disposable income. It indicates that households are still making up for the loss in purchasing power experienced in 2021-2022.
Inflation: Money Supply Money supply is the fuel for inflation over a long period of time. We analyze the change in various money supply measures to assess the likelihood of future, persistent inflation. As shown, different money supply measures peaked in 2022 and have declined since that time. The M1 money supply (currency, checking and savings accounts) has declined by approximately $2 trillion while the M2 (M1, money markets, and small CDs) has declined by approximately $1 trillion. We continue to expect disinflation over the course of the year. As with all economic data, we do expect some months of higher inflation within the disinflationary trend. |  |
Economy: US Gross Domestic Product (GDP)
The US economy has continued to slow at a moderate pace. The Conference Board’s 2024 US Economic Outlook updated its forecast for US GDP growth, and it estimates the economy will bottom during the third quarter and rebound in the fourth quarter. An important expectation for GDP growth is that the Federal Reserve will decrease interest rates during the second half of 2024. If lower rates are delayed, GDP acceleration will be pushed into 2025.
In conclusion, the economy’s slowest growth will occur during the third quarter and strengthen in the fourth quarter. The risk may be to an upside surprise if the consumer and manufacturing sectors remain strong.
Inflation: Truflation
Technology and big data change our personal lives but also affect economic indicators like inflation. Truflation, an economic data analytic company, uses large amounts of data (13 million data points versus 80,000 for traditional measures) to calculate their estimate of the “current” inflation rate. If accurate, Truflation estimates current US inflation at 1.81% as of July 16, which is near the Federal Reserve’s target.
Inflation: Expected Inflation Based on the stable money supply and supply chain, it is unsurprising to see expected inflation decline to within the Federal Reserve’s target range in 2024. As shown in the chart, inflation looks to drops into the mid-2% range by the end of 2024 and continues in that range for the foreseeable future. This should allow the Federal Open Market Committee (FOMC) to reassess how high interest rates need to be. If the economy slows more quickly or aggressively than anticipated, the FOMC will feel more comfortable lowering short-term rates. In conclusion, we expect that inflation will most likely be within the Fed range by year end. If the economy or labor market reaccelerates, our prediction may be delayed into 2025. |  |
Bonds: Future Interest Rates
Bond traders have begun to price in lower interest rates in response to weaker economic data and lower inflation. The large bars in the chart below reflect the expectations that either 2 or 3 rate decreases will occur before year-end. This is a volatile measure and will change as more economic data is reported. We expect the Federal Reserve to delay these decreases until inflation is nearing the target range of 2%. Expected interest rate decreases may cause fixed coupon, high credit quality bonds to outperform.
Bonds: Bond Returns
The yield at which an investor purchases a bond is the most important factor for future bond returns. Current yields are attractive relative to the past few decades. The chart below provides historical perspective on the relationship between the yield-to-maturities at purchase and subsequent bond returns. If possible, conservative, income-oriented investors should lock in these higher yields.
We expect bonds to provide decent returns based on the declining interest rates in the second half of the year.
Equities: Large Cap Earnings Growth The Magnificent 8 (now Magnificent 5) stocks have provided the most earnings growth over the past few years. However, it is projected that the S&P 495 (S&P 500 minus the Magnificent 5) will begin to catch up in terms of earnings growth. While the Magnificent 5 has produced tremendous earnings growth, the group is also priced expensively relative to those earnings when compared to other parts of the equity market. We measure how much we pay for $1 in earnings using the Price to Earnings (or P/E) ratio. As of July 16, 2024; the average P/E ratio of the Magnificent 5 is 46.4x while the S&P 500 has a P/E ratio of 26.6x. The S&P 500 is a capitalization-weighted index and is heavily skewed by the Magnificent 5. As such, we look to the S&P 500 Equal Weight Index to obtain a better indication of the broad equity market’s P/E ratio which currently stands at 20.4x. High P/E stocks can do well if they continue to have relatively high earnings growth. However, the trend is changing, and this change should help the other large cap stocks participate in the current equity bull market. |  |
Equities: Crowded Trade? One of the concerns regarding the current equity market is the level at which investors currently own stocks. This may seem counterintuitive. If all investors own stocks at the maximum allowable allocation, then it begs the question of who is left to buy stocks. If the new buyers don’t show up, then the equity market may decline under its own weight. This phenomenon was experienced by many households during the real estate bust of 2008-2009. The charts indicate that both households and professional money managers are near their peaks in owning stocks. Similarly, the American Association of Individual Investors reported that retail investors’ current stock allocation at 70.5% of their investments is nearing the highest in the past 10 years. The 10-year average is 66.5% with a maximum allocation of 72% (December 2017) and minimum allocation of 55% (March 2020). This high allocation may set the stage for higher volatility and corrections in the future. |  |
Equities: Concentrated Market Another concern regarding the equity market is the extent to which the largest stocks (Magnificent 5) affect the capitalization-weighted indices (i.e. S&P 500, Russell 1000) in terms of allocations and returns. As shown, the concentration is the highest since the 1960s. Generally, a healthy stock market is one in which many stocks participate in the market rally (i.e. broad equity market breadth). The AI-driven rally has increased the share of the largest technology and technology-adjacent companies to levels which may be deemed unsustainable. As long as the equity market is concentrated, it is vulnerable to corrections. What corrects this phenomenon? A few scenarios may unfold. One, the dominant stocks decline. Second, the dominant stocks decline while the laggards increase. Third, the dominant stocks maintain current levels while the laggards increase. Any of these situations could occur. As AI becomes more available for smaller companies, those companies may reduce their costs. These lower costs lead to higher profits which drives higher stock values. |  |
Equities: Small and Mid-Cap Earnings In our last Update, we discussed small cap stocks being a way to expose a portfolio to earnings growth. Similarly, small-cap stocks which have underperformed in recent years due to lower (or negative) earnings growth. Small/mid-cap stocks are generally considered to be riskier due to their higher reliance on floating-rate debt; approximately 49% of total debt. However, if the Fed begins lowering rates, then these stocks may be poised to increase their earnings more quickly than their large-cap counterparts. Higher earnings growth may translate into better stock returns. Our analysis suggest we may see a change in stock leadership in 2024 if the US economy continues to grow at a slower, but positive pace. Equities should continue to do well this year as earnings begin to underpin valuations. The stock market will continue to climb the wall of worry as inflation, interest rate, consumer and geopolitical risks dominate the news. Lower future interest rates should also help earnings growth in large cap (excluding Mag 5) and small/mid-cap stocks. |  |
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GDP Growth |
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Disinflation |
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Interest Rates |
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Geopolitics |
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| JWS Positioning |
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Fixed Income |
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Real Assets |
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