Economic Flash: A Tale of Two Economies


July 2024

US Economy: Depends on who you ask.

Aggregate data suggest continued economic resilience, but income bracket colors the consumer outlook. The top 10% of earners have been able to benefit from higher interest rates and stock market gains to account for roughly 50% of consumer spending. Meanwhile, lower-income households continue to experience the cumulative effects of inflation on staples like groceries and are falling behind as seen in rising credit card and auto delinquencies.

US Stocks: Equities surge, inflation slips.

A mid-month indication that inflation is not reaccelerating (2.4% annualized) encouraged investors who have been counting on at least one Fed interest rate cut some point this year. Large-cap stocks topped 15% in gains in the first half of 2024  and the technology sector was up more than 28%. Small-cap stocks, however, continue to languish given high borrowing costs, and in some corners, a lack of profitability despite an overarching perception of attractive valuations.

Foreign Stocks: AI also drives EM.

While developed market stocks fell alongside U.S. small caps, emerging markets (EM) were the top-performing sector globally. China (-1.9%) continues to grapple with sluggish consumption, mediocre industrial output and disappointing earnings. But equity markets in India (+7.0%), South Korea (+8.8%) and Taiwan (+11.9%) roared, with investors seeing their potential to directly or tangentially capitalize on the advancement of AI and the trend toward reshoring.

Fixed Income: Interest rates flat.

The 10-year U.S. Treasury yield finished June about where it started, just below 4.5%, despite intra-month volatility driven by oscillating views on inflation and Fed policy. Municipal bonds seemed to gain their footing but could face headwinds as municipalities hurry to bring new issues to market ahead of the Presidential election in November and potential expiration of the Tax Cuts and Jobs Act in 2025, which may make municipal funding more challenging.

Real Assets: Optimism for REITs.

Equities in the renewable energy and traditional infrastructure space were among the weaker performers as U.S. interest rates jogged a bit higher at month-end. Outside the energy sector (+4.1%), which got a lift from higher oil prices, most commodities also struggled. By contrast, REITs performed relatively well with high-profile transactions suggesting the worst might be over in certain sub-sectors, such as apartments (+5.8%) and self-storage (+7.3%).

Alternatives: Unthawing private equity.

Private equity valuations took a significant hit in 2022 and 2023 as rising U.S. interest rates threatened financing for companies from the seed stage on up. In 2024, capital has resumed actively flowing but selectively. As companies with strong backing from venture capital have shored up their balance sheets, fewer total private equity transactions are likely for some time, with capital continuing to target the cream of the crop.

Source of data: Bloomberg

Equities Total Return

U.S. Large Cap 3.6% 15.3% 24.5%
U.S. Small Cap (0.9%) 1.7% 10.0%
U.S. Growth 6.4% 19.9% 32.2%
U.S. Value (1.0%) 6.2% 12.9%
Int’l Developed (1.6%) 5.3% 11.5%
Emerging Markets 3.9% 7.5% 12.5%

Fixed Income Total Return

U.S. Agg. Bond 0.9% (0.7%) 2.6%
TIPS 0.8% 0.7% 2.7%
U.S. High Yield 1.0% 2.6% 10.4%
Int’l Developed 0.4% (2.4%) (0.2%)
Emerging Markets 0.9% 2.9% 6.2%
Intermediate Munis 1.1% (0.5%) 2.5%
Munis Broad Mkt 1.6% (0.1%) 3.5%

Non-Traditional Assets Total Return

Commodities (1.5%) 5.1% 5.0%
REITs 2.2% (2.2%) 5.8%
Infrastructure (2.9%) 4.0% 7.0%
Hedge Funds
Absolute Return 0.7% 2.7% 5.5%
Overall HF Market 0.3% 2.8% 5.4%
Managed Futures (2.2%) 7.2% 4.3%

Economic Indicators

JUN-24 DEC-23 JUN-23
Equity Volatility 12.4 12.5 13.6
Implied Inflation 2.3% 2.2% 2.2%
Gold Spot $/OZ $2326.8 $2063.0 $1919.4
Oil ($/BBL) $86.4 $77.0 $74.9
U.S. Dollar Index 124.2 120.2 119.6

Glossary of Indices

Our Take

We remain focused on potentially adjusting our strategic positions as we discern between what is market noise and what represents a secular shift. So, what are some of the things we are paying attention to that could challenge the otherwise resilient U.S. economy and markets?

  1. Unemployment. The U.S. economy in May broke its streak of 27 straight months of unemployment under 4%. There have been six other comparable streaks since 1949, and each of those were followed by a recession as unemployment continued to spike higher. Not saying history will repeat itself but certainly a yellow flag.  
  2. Elevated volatility. This is likely to be an unwelcome houseguest this summer as the markets increasingly price in the consequences of the Presidential election in November, including: the potential for new fiscal, trade and immigration policies as well as a contested election that risks eroding confidence in the U.S. as a beacon of democracy and capitalism.  
  3. AI outlook. The U.S. equity market’s 2024 performance has been driven by AI-related companies. Any reversal in fortunes—such as less impressive revenue and earnings results—could impact the broader market. 
  4. The unknown unknowns. An unexpected shock to the system is always possible but it is perceived as more likely during periods of higher instability, where we find ourselves today.  The state of homeostasis that we’ve all become used to can quickly evaporate as an  exogenous shock changes stability to instability.  

In our Q3 Economic Commentary, due out July 18, we delve into both the investment risks and opportunities created by higher levels of political, economic and geopolitical uncertainty, and how LNW portfolios are positioned as a result.