What’s New
Following a couple of months of macroeconomic surprises, May seemed to be a quieter month. Inflation data resumed its downward trend after providing some cause for concern in April.
This allowed for sovereign yields to fall, helping to push equities higher through the first half of the month. Interestingly, rates and markets both turned mid-May, with higher rates weighing on headline indices in the US.
Nevertheless, US equities ended the month higher, with the S&P 500, Dow Jones Industrial Average, and Nasdaq returning 4.96%, 2.58%, and 6.39%, respectively.
Treasury yields moved lower over the same time frame.
Taking a step back and trying to ignore some of the noise, the broader backdrop remains largely unchanged. Data continues to suggest that the US economy is slowing.
Now it is more than fair to wonder what that ultimately means – are we heading for a harder landing or simply coming off unsustainably high levels of growth?
Right now, it certainly appears to be the latter, though the former is not off the table. Inflation is trending lower, but as we’ve seen, it may not be a smooth ride down and upside risks clearly remain.
This complicates the Fed’s job and has pushed expectations for rate cuts into the back half of the year. Meanwhile, political rhetoric is starting to heat up with a promise to get much, much hotter soon, and geopolitical tensions remain elevated.
Against this backdrop of elevated risks, markets continue to look very expensive in the US. We’ve been talking about several industries being priced to perfection, and we continue to believe that this is the case.
In fact, we saw several companies sell off aggressively on fairly benign earnings simply because of the expectations that were baked into the valuation. Such an environment continues to necessitate a focus on risk management.
Our Perspective
We believe that our active approach to investment management will continue to allow us to uncover investment opportunities, while largely avoiding parts of the market where we see elevated risks moving forward.
It is yet to be known if the Fed can bring inflation down from the levels we’ve seen without causing significant economic hardship, leaving the questions of whether a soft landing can happen and when the first rate cut will be this year lingering in the air.
With the US economy showing cracks, earnings would likely be hit hard by the economic slowdown driving the Fed to cut. However, the continued resiliency of the US economy and the downward trend in inflation have increased the odds of a more benign outcome. Meanwhile, valuations are far from attractive at a broad level, and it leaves us wondering what many market participants are playing for.
We continue to closely monitor for signs of weakness and what it all can mean for the start of a rate-cutting cycle, as we prioritize risk management with a defensively positioned strategy in our core portfolios.
2024 Election: What We Think for Markets
With the election under six months away, it’s only natural to be concerned about the market implications of different outcomes. After all, the economy is slowing, inflation is threatening to remain elevated, and financial markets look fully priced. Could elections be the straw that breaks the camel’s back? Read the article for our full thoughts.
Our View
Source: Bloomberg
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Read the full article here