The month of June saw rising unemployment and a cooling of labor markets, coupled with treasury yields trending lower, resulting in mixed returns across the broad markets. Most equities, including small and mid caps, experienced negative returns while large caps and interest-sensitive asset classes like bonds and real estate posted positive returns as the lower yields pushed prices higher.
“‘We are well aware that we now face two-sided risks,’ Powell told the Senate Banking Committee. ‘We can no longer focus solely on inflation. The labor market appears to be fully back in balance.’”
In June, with the release of the Personal Consumption Expenditures (PCE) report, inflation metrics demonstrated continued stability following last month’s trend. Both Headline PCE and Core PCE showed slight downticks in year-over-year price growth, dropping from 2.68% to 2.56% and from 2.78% to 2.57%, respectively. Similar to last month, a closer look at the month-over-month changes in Core PCE shows further encouraging data, as the reading dropped from 0.26% to 0.08%. While the monthly trend for the past few months is on a positive trajectory, month-to- month data can be volatile, and the Federal Reserve has maintained their cautious stance on rates and appear to be looking for further corroborating positive data.
Another trend that has continued this month is the cooling- off of the US job market. The job gains posted in May have since been revised downward, from the initially reported 272,000 to 218,000, suggesting that the earlier estimates were overly optimistic. Year-over-year average hourly earnings growth have also shown a decline, decreasing from 4.05% in May to 3.86% June. This marks the smallest gain in wages since June 2021, pointing to a slowdown workers’ earnings. However, this reduction in wage growth may be a sign that economic headwinds are beginning to normalize, as wage increases in the 3%-3.5% range are seen as consistent with the Federal Reserve’s 2% inflation target and would be reflective of a balanced economic environment. While Unemployment has seen its fourth consecutive 0.10% increase, bringing the unemployment rate to 4.10% in June, this remains relatively low compared to historical averages. This, combined with the fact that the 8.14 million available job openings stands well above the 6.36 million job seekers indicates that the labor market remains resilient.
The Federal Reserve has maintained its benchmark interest rate at 5.25-5.50% for the seventh consecutive meeting, reflecting a cautious approach to monetary policy. With the labor market seemingly stabilizing, we may see this cautious stance change if the recent trend in inflation continues. In his testimony to Congress on July 9th, Fed Chair Jerome Powell provided insights into the Fed’s perspective on the current economic landscape. He noted that the U.S. is “no longer an overheated economy,” with a job market that has cooled from its pandemic-era extremes and, in many ways, has returned to pre-crisis conditions. “We are well aware that we now face two-sided risks,” Powell told the Senate Banking Committee. “We can no longer focus solely on inflation. The labor market appears to be fully back in balance.” Powell’s remarks indicate a shift in the Federal Reserve’s approach, acknowledging the need to consider both inflation and other economic factors, such as employment stability, in their policy decisions. They also suggest a growing case for potential interest rate cuts in the near future and highlight the evolving challenges of taming inflation while attempting to navigate a ‘soft landing’ for the economy.
As June concluded, large-cap stocks continued their outperformance in 2024, closing out the first half of the year on a strong note. The S&P 500 index returned 3.59% for the month, bringing its year-to-date return to an impressive 15.29%. Conversely, small caps have struggled, not just this year but over the past few years. With the S&P 600 down 0.72% year-to-date. This performance gap between the two indices can be partially explained by their respective sector compositions. The S&P 600 has a larger weight in traditional sectors like real estate and industrials and is underweight technology, while the S&P 500 has benefitted from a much larger allocation to technology stocks. Additionally, small-cap stocks are generally more sensitive to uncertainty, interest rates, inflation, and economic cycles. The higher inflation, rising rates, lingering economic challenges from COVID-related disruptions, and Fed tightening we have seen recently have unsurprisingly contributed to the underperformance of the S&P 600.
Bonds on the other hand have experienced positive returns as yields fell, with the 10-year treasury dropping from 4.51% down to 4.36% last month. This is partly attributable to cooler economic data and a higher probability of rate cuts in the near-term than initially expected at the beginning of the month.
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~Diligently Yours,
Your Smarter Way Portfolio Management Team
Please note this is for information purposes only and should not be construed as investment advice or recommendations made by A Smarter Way to Invest. Please contact your Advisor if you have any questions about this market update report or if you would like to discuss your personal financial situation in more detail.
