“You can’t predict. You can prepare.” – Howard Marks
While there has been a divergence in 2024 amongst the various equity indexes we follow, May was a positive month across the board. The S&P 500 has been the best performing year-to-date, with the mid-cap S&P 400 lagging and the small-cap S&P 600 moving out of the red to barely positive thus far in 2024. Looking overseas, the S&P 500 return is almost double the return of the MSCI World Index. Commodities were modestly lower as the US Dollar Index lost 1.55% of its value. Bonds were positive for the month.
All data as of 06/03/2024, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
At the end of May 2024, the S&P 500, S&P 400, and S&P 600 indices continued to demonstrate strong technical performance, with all three indices maintaining positions above their 200-day and 50-day moving averages. This alignment suggests to us there is a sustained upward momentum across large, mid, and small-cap stocks and broad market strength. The S&P 500, representing the largest companies, continues to lead, while the S&P 400 reflects solid growth and investor confidence in the mid-cap sectors. The only concern would be the lagging performance of the small-cap S&P 600, positive for 2024, has not yet eclipsed the index’s all-time highs reached in late-2021. We believe the current technical setup underscores a positive market sentiment and potential for continued bullish trends.
While technical analysis is valuable, understanding fundamental factors is crucial for sustained market trends. Real businesses, influenced by economic conditions, consumer behavior, and inflation drive stock prices over time. Which is what we want to discuss this month.
Chart #1: www.stockcharts.com Data 06/01/22 – 05/51/24 as of 06/03/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Chart #2: www.stockcharts.com Data 06/01/22 – 05/51/24 as of 06/03/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Chart #3: www.stockcharts.com Data 06/01/22 – 05/51/24 as of 06/03/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Thoughts on Inflation
Inflation in the United States has been a focal point of economic discussion for more than three years, driven by a confluence of factors including pandemic-induced supply chain disruptions, significant fiscal stimulus, and shifts in consumer demand. The Consumer Price Index (CPI) has reflected higher-than-average increases. With prices rising across various sectors, from groceries to fuel, the purchasing power of the average American has been noticeably impacted. The Federal Reserve’s (the Fed) response -increases in interest rates starting in 2021 – aimed to temper this inflationary pressure without stifling economic growth has been successful in lowering the rate from 7.0% in 2021 to the most recent reading of 3.4%.¹ This remains above the stated Fed policy goal of a 2.0% annualized inflation rate.
Looking ahead, the trajectory of inflation in the next 12 months remains uncertain, but we are seeing some green shoots for the consumer.² McDonald’s, for example, is introducing a $5 meal deal that starts on June 25th, aimed to address customer frustration over high prices (and slowing sales). Target executives, at their first-quarter earnings call with investors, announced that the company has reduced prices on more than 1500 items. Over the summer they expect the list to grow to almost 5000 with lower prices.³ At a recent investor’s call, Walmart CEO Doug McMillon, indicated prices were going down on certain food categories with eggs, apples, and deli snacks significantly lower than a year ago.⁴ This reiterated a previous statement that the retailer could be entering a “deflationary environment,” where certain grocery and consumable items may start to deflate.⁵
While this is all very positive, it doesn’t indicate that inflationary pressure is behind us. Nor does it mean that prices on non-commodity items will be going back to where they were in 2019. That’s just not the way the world works, and deflation is not something we believe anyone should want to see happen.
Thoughts on the Consumer
The current state of the American consumer reflects a dichotomy, with marked differences between those at the lower and upper ends of the economic spectrum. Lower-income consumers have been grappling with significant challenges exacerbated by inflationary pressures and rising costs of living. Essentials such as food, housing, and fuel have seen substantial price increases, straining household budgets. Despite some degree of real wage growth in low-income sectors, these gains have often been insufficient to offset the rising expenses, leading to increased reliance on credit and savings depletion.
Consumers at the upper end of the economic spectrum, conversely, have generally fared better amidst these economic conditions. High-net-worth individuals and those with substantial investments have benefited from robust stock market performance and appreciating asset values, including real estate. Those with cash in the bank or in brokerage accounts have also benefitted from increased interest rates received on these balances. As a result, their spending patterns have remained relatively resilient, with a noticeable shift towards luxury goods and services, travel, and real estate investments.
The disparity between these two consumer groups underscores why it is easy to misunderstand consumer spending trends, which continue to hold up in the face of higher interest rates and inflationary pressure. Those at the top continue to see their wealth grow so they continue to spend; those at the bottom struggle to make ends meet. Policymakers face the challenge of addressing this divide through measures that can provide more equitable economic opportunities and support.
Thoughts on the Economy
Throughout 2021 and 2022 it seems you couldn’t go more than a few days without hearing that inflation, rising interest rates, or the crumbling consumer would bring the economy down and into recession. It is now June, 2024, and that recession has yet to occur. As of the end of April 2024, Gross Domestic Product (GDP) continues to be positive, unemployment stood at 3.9%,⁶ and inflation for the 12-month period was 3.4%.⁷ Overall, we believe this is a positive economic situation.
Yet, there is a huge perception gap that surrounds the economy today. Survey data tells us that many people in the country believe that the economy is not doing well, with 56% mistakenly believing we are currently in a recession.⁸ Likely culprits for this disconnect range from economic inequality, inflation and not liking higher prices, politics, and media coverage. Kyla Scanlon, author of In the Economy, coined this gap between financial sentiment and economic reality as a “vibecession.”
Empirically, what we have found is, in general, the people we know are doing well, and their family and friends are doing well, continuing to live their lives without much economic strain. Would they prefer to pay less for groceries? Absolutely. Are higher prices stopping them from buying what they want? In general, no, but that may be changing.
There is a feeling of normalcy starting to come back to the economy. Calendar years 2022 and 2023 had a feeling that people were getting caught up from what they “missed out on” in the pandemic. Instead of one big vacation, take three. Demand for live music seemed never-ending (see Taylor Swift’s Eras Tour for an example of what people were willing to pay). Essentially, people are making choices again.
Final Thoughts
Inflation is moderating but not tamed. Consumers are spending but being more discriminate in what that spending looks like. It feels like we have hit the point where the cure for higher prices is higher prices is actually happening. We know this because the large retailers are telling us about it when they report earnings.
The current moment feels to us like a critical point in time for what happens with the stock market moving ahead. Momentum and good vibes can only take markets so far. Reality eventually hits. For publicly traded companies the key is, what does the current situation mean for earnings?
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Sources:
¹ Current US Inflation Rates: 2000-2024 (usinflationcalculator.com)
² The phrase “green shoots” refers to small, positive signs of growth or improvement within an otherwise challenging or stagnant environment. These shoots represent new life and the promise of better days ahead. In the context of the economy, “green shoots” describe early indicators of recovery.
³ Target Corporation (TGT) Q1 2024 Earnings Call Transcript | Seeking Alpha
⁴ Walmart Inc. (WMT) Q1 2025 Earnings Call Transcript | Seeking Alpha
⁵ Walmart Is Lowering Prices Back to Pre-Inflation Levels (foodandwine.com)
⁶ Monthly unemployment rate U.S. 2024 | Statista
⁷ Current US Inflation Rates: 2000-2024 (usinflationcalculator.com)
⁸ More than half of Americans think the U.S. is in a recession. It’s not. (axios.com)
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com