May 2024 Newsletter

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Read May 2024 Market Insights

Consumer Spending Slowed, What Does That Mean for Gross Domestic Product (GDP)?

U.S. economic growth slowed notably in the first quarter of 2024, with GDP expanding at a 1.6% annualized rate, down from 3.4% previously. The moderation was partly due to a decline in durable goods spending, suggesting some consumer fatigue amid higher interest rates. However, services consumption grew strongly, indicating ongoing consumer resilience. The GDP miss was largely attributed to volatile factors like foreign trade and inventories, with imports outpacing exports due to robust domestic demand. Despite the headline slowdown, domestic demand remained solid, supported by consumption, business investment, and housing growth. As the economy gradually cools, we anticipate growth settling around 1.5% – 2% by late 2024, before potentially picking up again as the Federal Reserve eases monetary policy.

What Will Happen With Interest Rates?

The core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, confirmed stalled progress toward the 2% target in the first quarter, aligning with previous CPI data. Core PCE rose 0.3% from the prior month and 2.8% from a year ago, similar to February’s levels but lower than core CPI due to differing housing weight. Despite elevated inflation, the Fed is expected to maintain its patient stance on rate cuts given economic resilience. We anticipate inflation to moderate in the coming months, possibly prompting Fed rate reductions later this year. While recent inflation trends may raise concerns, a slowdown in rents and wage growth could shift the narrative, with further inflation progress expected over time.

“Sell in May and Go Away?”

Contrary to the popular market adage “sell in May and go away,” historical data suggests that seasonal declines in the stock market during summer are not consistently observed. Over the past four decades, the average return for the S&P 500 from May to August has been a respectable 3.4%, with the market recording gains in more than three-quarters of those periods. Positive year-to-date trends heading into May have historically been indicative of strong full-year performance for stocks, dispelling the notion that investors should exit the market during the summer months based solely on seasonal patterns.

How Have the Magnificent 7 Been?

Last week was a busy time for earnings reports, especially for major tech companies known as the “Magnificent Seven.” About 80% of these companies beat earnings expectations by a significant margin, lifting market confidence despite high valuations. The Magnificent Seven, including Tesla, Alphabet (Google), Microsoft, and Meta (Facebook), are expected to show a strong 47% profit increase in Q1, far above the S&P 500’s 2% growth forecast. Alphabet performed exceptionally well, beating estimates and announcing its first dividend, while Meta’s stock dipped due to a lower revenue outlook and plans for increased spending. Despite high valuations, companies are generally meeting or exceeding expectations, suggesting continued revenue growth and potential profit improvements as input costs stabilize. The impressive rally in big tech is fueled by AI growth prospects, but we anticipate a narrowing gap with other sectors later this year as the rally expands.

Please make sure you are meeting with your advisor to ensure your financial plan is being reviewed!