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Market Perspective: Emerging Markets, Vote don't Trade, Inflation below 3%, and Rate Cuts

Posted on Monday, July 15, 2024

Click here for summary video (~4.5 minutes)


I hope your summer is going well!! We want to briefly interrupt your travel plans and sunshine with an update on markets and the overall economy. The highly sought after ‘soft landing’ appears imminent, a remarkable feat considering the dramatic rate increases enacted to combat inflation. Typically, dramatic rate increases lead to a slowdown, which either halts the increase of prices or creates deflation as with the COVID recession. Fast forward two years, and we are debating a rate cut during an expansion, something that’s only happened five times since 1950. Gross Domestic Product (‘GDP’) is projected to remain positive in the U.S., many international countries are nearing or in an upswing in their respective cycles, and Q2 offered upward forward revisions to company earnings after strong results to date. However, cracks are appearing in the runway of the aforementioned soft landing with unemployment increasing to 4.1%, inflation still above the 2% target, business indices dropping out of expansion territory. Perhaps the most concerning indicator relates to misinformation leading 69% of Americans in a massive Transunion survey to believe inflation rates are higher than a year ago and that the economy is worse. Neither are true! Sometimes people aren’t happy unless they’re mad.


Fortunately, economic resilience remains the key theme as we head into the second half of the year and here are some specific considerations to digest:


Q2 delivered an up and down market with April nearing, but not reaching pullback territory, with Emerging Markets leading the way.



Let’s succinctly address the election: vote it, don’t trade it. We will know the next U.S. President by the time we send our next (highly anticipated!!) market commentary. Voters (on all sides) claim the economy will collapse if their candidate loses. This is never the truth. Looking back through history, staying invested through party changes is optimal by a factor of 10x since 1961. Also, the S&P 500 has been up 20 out of 24 election years since the 1920s. This is not to say elections and policy don’t matter; they certainly affect business and financial decision making. But, it’s imperative to consider that businesses and families alike are focused on delivering positive economic outcomes in any political, taxation, or other variable environment. And, because markets are smarter than us, policies and legislation are quickly incorporated and reflected in market prices. Vote in the election - don’t trade on it.


Unemployment increased to 4.1%, off the 3.4% low. Zooming out, this is not alarming in terms of U.S. labor, as the average is 5.69% since the 1940s. In addition, the wage gains are above inflation for the previous 12-months. The concern is simply the directional change, coupled with the average time to find a job is now 9.8 weeks, also higher than a year ago. There is plenty of employment wiggle room considering the wage gains. While this broad perspective is helpful for the overall economy, we recognize that the individual experience of job loss can be devastating with lasting impacts.


Inflation around the world has improved, and U.S. Inflation is below the historical average at 3.27%. Inflation has stabilized and wages have outpaced it, making real inflation realized by consumers <0. Looking outside the U.S., inflation is now between 0.80% (China) and 3.80% (Italy). Notably, the entire Eurozone is at 2.60% and the U.K. is at 2%.


The increase of unemployment may finally warrant the desired Federal Reserve (Fed) rate cut. Recall the Fed’s mandate is to control inflation, while maximizing employment. In previous notes, we’ve argued there was not a case for meaningful rate cuts, if any at all. You should expect the Fed to take note of softening labor markets. In fact, similar data points already prompted the U.K. and Canada central banks to cut rates.


Volatility is a normal part of expected market behavior; it doesn’t indicate a collapse! It means new information is being priced in. As we frequently remind you, historical data tells us to expect a pullback of at least 10% annually. April saw increased stock market volatility, though we never quite hit a 10% pullback. Meanwhile shorter term, high quality bond holders were rewarded for diversifying. And of course, increasing volatility metrics generated doomsday headlines, without the context that volatility has been high in many overall positive years. For example, volatility was well above average in the late 1990’s, 2001, 2003, 2012, and 2021. All great years for market performance!


While only death, taxes, and shipping/handling fees are guaranteed, it’s critical to maintain discipline in adhering to the elements of your financial plan and investment approach which can be directly controlled. Keep your cool in this heat! Literally and figuratively! Stay the course, and as always, reach out to us with any changes in your family’s circumstances, so we may adjust your plan accordingly.






Sources: Ycharts, ATL Fednow, Fred.com, Zacks.com, First Trust


This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.


Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.


Index Disclosures:


Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.


Index Definitions:


The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.


Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.


S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


MSCI EAFE: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States and Canada. The MSCI EAFE index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in the United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


The Russell 3000 index is an unmanaged index of 3000 companies in the United States. The Russell 3000 Index is used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

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