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Summer 2024 Investment Outlook – July 23 Replay
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Market News
Market analysis
July 22, 2024
Number of the week:
6.7%
The Russell 2000 Index’s return so far in July, after gaining just 1.0% in the first two quarters of the year.
Term of the week:
Federal Reserve Beige Book
A summary and analysis of economic activity and conditions, prepared with the aid of reports from the district Federal Reserve Banks and issued by the Fed eight times per year for its policy makers before a Federal Open Market Committee meeting.
Quote of the week:
Seasonality trends suggest tempered returns during the “dog days of summer.” Over the past 20 years, July ranks as the best-performing month, up an average 2.4%. August and September are among the worst, with August up a modest 0.1% and September losing 0.6%.
― Terry Sandven, Portfolio Manager, Chief Equity Strategist, U.S. Bank
Global economy
Quick take: Positive job growth and wage gains underpin resilient U.S. consumer spending, while elevated interest rates remain a headwind for single-family housing market activity. Weak consumer sentiment continues to weigh on China’s growth prospects.
Our view: The global economy continues to see moderating growth, especially across manufacturing activity, and inflation continues to decelerate. Despite higher interest rates, the U.S. Bank Economic Team sees conditions consistent with a soft landing in the U.S.
- U.S. retail sales were flat in June due to reductions in gasoline sales on lower prices and a fall in motor vehicle sales, but most other categories posted gains. In the second quarter, control group sales, which exclude gasoline stations, autos, building materials and restaurants, rose almost 1%. Consumer spending remains resilient, buoyed by a solid labor market despite soft consumer sentiment.
- U.S. homebuilder sentiment remains depressed by high borrowing costs and concerns about slowing buyer traffic. The National Association of Home Builders Housing Market Index slipped one point to 42 in July, the lowest reading since December. June housing starts and building permits improved relative to May estimates but at 1.35 million and 1.45 million units, respectively, are well below year-ago rates. High interest rates remain a challenge for housing market activity despite low inventories.
- Property market struggles and soft consumer spending weighed on China’s second quarter gross domestic product (GDP). GDP slowed to a year-over-year pace of 4.7% from 5.3% in the first quarter. Retail sales, industrial production and fixed asset investments were all softer. An acceleration in exports and a decrease in imports were supportive but likely reflect one-time boosts. Policy easing efforts are doing little to rekindle consumer spending, and home prices continue to moderate.
- Sunday afternoon, President Joe Biden announced he will no longer seek the Democratic nomination for re-election but will serve his remaining presidential term. He endorsed Vice President Kamala Harris as the Democratic candidate, but the process for determining the party’s next nominee remains unclear just four weeks before the Democratic National Convention on August 19. According to Real Clear Politics, prediction markets early Monday morning continue to show former President Trump leading potential Democratic challengers, with bettors favoring Kamala Harris as the eventual nominee.
Equity markets
Quick take: Large-company U.S. equities are retreating despite favorable fundamentals, just before of two of the historically worst performing months of the year.
Our view: The fundamental backdrop remains favorable for U.S. equities. Inflation is falling, interest rate cuts are looming, earnings are trending higher, performance breadth is expanding, and consumer and business spending appear resilient. However, valuations are elevated, and August and September are historically among the worst months for the S&P 500.
- Year- and month-to-date performance reflect differing trends and shifting investor sentiment. As of Friday’s close, the S&P 500 and NASDAQ Composite are up 15.4% and 18.1%, respectively, for the year; all 11 S&P 500 sectors are positive, with five up 10% or more. The Real Estate sector is the relative laggard, up a modest 1.0%. Conversely, in July, the S&P 500 is up only 0.8% and Real Estate is the best-performing sector, up 5.4%. The small cap-oriented Russell 2000 is up 6.7% for the month after gaining only 1% in the first two quarters.
- Seasonality trends suggest tempered returns during the “dog days of summer.” Over the past 20 years, July ranks as the best-performing month, up an average 2.4%. August and September are among the worst, with August up a modest 0.1% and September losing 0.6%.
- Broad market valuations are elevated, but rising earnings provide valuation support. Analysts forecast S&P 500 earnings of roughly $243 per share for full-year 2024 and $277 in 2025, according to Bloomberg, FactSet and S&P Cap IQ, reflecting robust 10% and 14% year-over-year growth, respectively. Price-earnings multiples of roughly 23.5 times last 12-month earnings and 20.9 times next 12-month estimates are both modestly above 30-year averages, albeit still short of extremes.
- Second quarter results are trending in line with expectations. As of Friday’s close, with 14% of S&P 500 companies reporting results, sales and earnings are advancing 4.3% and 8.8%, respectively, in line with expectations of 4.4% and 8.6%. More definitive conclusions about the pace of inflation, consumer and business spending trends, and expectations for the second half will be forthcoming this week and next when another 63% of companies release results.
Bond markets
Quick take: Yields were relatively steady across most bond categories last week as evidence of gradually cooling economic activity in the Federal Reserve’s (Fed) Beige Book report on regional business conditions remained broadly in line with investor expectations for rate cuts starting later this year.
Our view: Normal bond exposures appropriately position investors for gradually slowing economic growth. Primarily allocating to high-quality bonds generates stable portfolio income while modestly allocating to riskier high yield bonds may improve return potential over time.
- Mounting evidence of slowing inflation keeps Fed interest rate cuts in play. In an interview last week, Fed Chairman Jerome Powell noted inflation slowed in the second quarter and is in a “pretty good place,” roughly meeting the Fed’s expectation for progress toward the price stability target. The Fed also released its Beige Book, which summarizes surveys on economic conditions across the regional Fed districts. While the Beige Book noted modest overall price increases, almost every Fed district reported anecdotes of retailers discounting items and consumers shifting spending to lower-cost goods or only essential items. Reports on economic activity were also mixed, with seven districts noting slight increases in activity and five reporting flat or declining activity. These anecdotes largely confirm recent softening in growth and inflation data, providing additional evidence in support of the Fed reducing rates later this year. Bond yields reflect investor expectations that the Fed will reduce rates 0.25% in September and cut an additional one or two times before year end. High-quality bonds with normal maturity profiles offer compelling yields with opportunity for slight bond price increases should the Fed gradually reduce rates.
- Corporate and municipal bond valuations reflect expectations for positive credit conditions going forward. Riskier high yield corporate and municipal bonds offer extra yields over Treasuries that are below historical averages. While this implies valuations are somewhat high, it also reflects strong demand for riskier bonds and investor confidence in accepting credit risk. Slowing corporate defaults and improving bond ratings actions from Moody’s, a credit ratings agency, back investor optimism. Like most fixed income categories, high yield corporate and municipal bonds offer meaningful income opportunities relative to their recent history.
Real assets
Quick take: Most real assets traded well versus the S&P 500 last week, with a technology-related selloff in the equity market leading to strong performance from the year’s laggards. Real estate and infrastructure stocks outperformed the broader market for a second consecutive week, but participation was not as broad-based as the previous week. Commodities were led lower by industrial metals, but all commodity sub-sectors posted negative results.
Our view: Diversified publicly traded real estate remains inexpensive relative to private real estate. Tangible assets with stable cash flows present relative opportunities if currently strong investor sentiment erodes. Commodities can be compelling due to their potential for inflation protection.
- Real estate outperformed the S&P 500 by 3.5% last week. Retail and industrial properties posted the strongest returns while data centers and office companies fared the worst. Publicly traded real estate continues to trade at discounts to private markets (individual properties).
- Infrastructure stocks beat the broader market by 1.8% last week. Railroads and midstream energy led gains while airports and utilities were the worst performers.
- Crude oil prices fell 3.3% last week despite large declines in domestic inventories of crude and gasoline. Over a longer-term horizon, the crude oil market appears undersupplied, which should act as a tailwind to prices. However, we acknowledge downside risk to prices if tensions in the Middle East de-escalate or if economic growth disappoints.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The NASDAQ Composite Index is a market-capitalization weighted average of roughly 5,000 stocks that are electronically traded in the NASDAQ market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The National Association of Home Builders (NAHB) Housing Market Index (HMI) rates the relative level of current and future single-family home sales. The data is compiled from a survey of around 900 home builders. A reading above 50 indicates a favorable outlook on home sales; below indicates a negative outlook.
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Equal Housing Lender. Deposit products offered by U.S. Bank National Association. Member FDIC. Credit products are offered by U.S. Bank National Association and subject to normal credit approval.