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Market analysis
May 6, 2024
Source: Global Economic Health Check, U.S. Bank Asset Management Group, April 26, 2024.
U.S. Bank Global Economic Health Check
The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.
Number of the week:
-4.2%
The S&P 500’s return in April. The index was still up 5.6% for the year through April 30.
Term of the week:
Average hourly earnings
Total earnings or payroll divided by the total number of hours for which employees received pay during the entire pay period, calculated by the U.S. Bureau of Labor Statistics.
Quote of the week:
U.S. labor market data moderated last week, revealing slower non-farm payroll growth, a higher unemployment rate, weaker average hourly earnings and lower job openings. Non-farm payrolls grew by 175,000 jobs in April, the lowest monthly gain since October, while the unemployment rate ticked up to 3.9%. Average hourly earnings grew just 3.9% over the past year, decelerating from 4.1% in March and well below the most recent peak of 5.9% in March 2022.
― Robert Haworth, CFA, Senior Vice President, Senior Investment Strategy Director, U.S. Bank
Global economy
Quick take: The U.S. job market softened over the past couple of months, perhaps indicating higher interest rates are working to moderate the resilient U.S. economy. Purchasing manager surveys indicate still-solid global activity, though Europe remains weak. India remains strong and China may be starting to rebound.
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. labor market data moderated last week, revealing slower non-farm payroll growth, a higher unemployment rate, weaker average hourly earnings and lower job openings. Non-farm payrolls grew by 175,000 jobs in April, the lowest monthly gain since October, and the prior two months were revised lower by 22,000 while the unemployment rate ticked up to 3.9%. Average hourly earnings grew just 3.9% over the past year, decelerating from 4.1% in March and well below the most recent peak of 5.9% in March 2022. Job openings fell by 325,000 to 8.49 million, another sign of an easing labor market. Additionally, the Conference Board Consumer Confidence Index fell in April for the third month in a row, highlighting concerns over higher gasoline prices and fears of a softer job market.
- Purchasing manager indexes fell to a level indicating contraction for both manufacturing and services in April, according to the Institute of Supply Management Services. The services index revealed contraction for the first time since December 2022, and both pointed to rising prices and weaker employment and new orders trends.
- Global manufacturing activity appears to be in a modest recovery, according to purchasing manager surveys from S&P Global. China, India and Brazil are seeing expanding output, while Europe remains among the weakest economies. Indicators of new orders and new export orders improved, though price pressures are building with increases in input and selling costs.
- Inflation continues to moderate in Europe, and the gross domestic product (GDP) recovered in the first quarter after two negative quarters. Inflation rose just 2.4% year-over-year in April, matching the rate in March. Core prices, which exclude food and energy costs, rose 2.7% — down 0.2% from March. The GDP rose 0.4% after contracting 0.1% in both the third and fourth quarters of 2023.
Equity markets
Quick take: U.S. equities inched higher during the first week of May on the heels of better-than-expected first quarter earnings reports.
Our view: Inflation, interest rates and earnings trends are directionally consistent with higher equity prices. Inflation, while still persistent, appears to be waning, interest rates are elevated but with downside bias, and 2024 earnings projections are stable.
- Year-to-date large company equity performance remains positive. The S&P 500 closed May 3 up 7.5% for the year, with 10 of 11 sectors positive, led by the Communication Services (16.5%) and Energy (10.4%) sectors. Information Technology is up 9.9% for the year following a 3.4% gain in the first three days of May on first quarter earnings strength. Equally noteworthy is the performance resurgence of the defensive- and income-oriented Utilities sector, up 7.9% year-to-date and 2.5% during the first three days in May, perhaps a market signal of waning inflation and expectations for a more dovish Federal Reserve (Fed) monetary policy in the second half of the year.
- First quarter results are trending above expectations, with 80% of S&P 500 companies having released results as of Friday’s close. Sales and earnings are advancing 4.2% and 5.0%, respectively, above expectations for both to advance 3.3%. The first quarter release period is nearing its close, with 11% of S&P 500 companies planning to release results this week followed by another 2% next week.
- On balance, consumer balance sheets are in reasonably good shape, with spending on entertainment and travel areas of strength. Food spending is mixed; most restaurants are citing the negative impact of more cautious consumers. Additional insights, particularly around consumer spending on goods, will be gleaned when high-profile retailers such as Home Depot, Walmart, Target, Costco, Dollar Tree and Lululemon report first quarter results later this month. Business technology spending remains healthy, particularly on cloud, artificial intelligence, software and advertising. Artificial intelligence bellwether NVIDIA is slated to report on May 22.
- Earnings projections for 2024 are inching higher, providing valuation support. Analysts forecast approximately $243.50 earnings per share for S&P 500 companies in 2024, according to Bloomberg, FactSet and S&P Cap IQ, reflecting 10% year-over-year growth. At current levels, the index trades at 21.1 times the 2024 estimate, at the high side of its 25-year historical average.
Bond markets
Quick take: The Federal Reserve held the federal funds rate steady last week, but Treasury yields fell in reaction to Friday’s jobs data that highlighted progress rebalancing the labor market and easing wage inflation.
Our view: Announcements last week on the U.S. Treasury’s issuance plans and Fed guidance that it will slow the reduction in its Treasury holdings improve the balance of risks facing high-quality bonds. However, stubborn inflation remains the key headwind preventing the Fed from reducing interest rates.
- The Fed held interest rates steady in a range of 5.25% to 5.50% and cautioned of a “lack of further progress” on inflation last week. Fed Chairman Jerome Powell said that while he still believes policy is restrictive and positioned to thwart recent price increases, the committee needs to see more evidence that inflation is coming down before members are confident enough to cut rates. Market interest rates indicate expectations for one to two 0.25% rate cuts in 2024 starting in the fall. The alignment of Fed and market expectations for rate policy increases the importance of employment and inflation data.
- Messages from the U.S. Treasury and Fed last week both imply lower Treasury supply for investors to absorb. The U.S. Treasury announced its quarterly auction schedule last week and noted further long-term bond auction size increases may not be needed. Reliance on short-term Treasury bill issuance decreases upward pressure on long-term bond yields over the near-term, but the large deficit remains a structural headwind facing long-term bond investors. Powell also announced plans to slow the Fed’s balance sheet reduction strategy, known as quantitative tightening. The Fed plans to reduce the amount of Treasuries it is allowing to mature without reinvesting the proceeds, down from $60 billion per month to $25 billion starting in June.
- The extra yields on corporate and municipal bonds over Treasuries remain below historic averages. Slightly expensive valuations on corporate and municipal bonds reduce incentive to increase credit risk in portfolios, but these bonds can still provide meaningful income return. Modest allocations to esoteric bond categories like mortgages not backed by the government and reinsurance (insurance-linked notes) can further improve portfolio income.
Real assets
Quick take: Infrastructure assets and Real Estate posted strong results last week, with the decline in interest rates supporting dividend-producing stocks. All commodity sub-sectors were lower on the week.
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 1.2% last week. Cell towers and data centers posted the strongest returns while residential and retail companies lagged. However, all Real Estate sub-sectors posted positive results. Publicly traded real estate continues to trade at discounts to private markets (individual properties).
- Infrastructure stocks beat the broader market by 1.6% last week. Utilities and airports led gains while railroads and midstream energy detracted from performance. Utilities are now outperforming the S&P 500 on the year.
- Crude oil prices fell 6.8% last week, with domestic inventories experiencing a large increase and Middle East peace talks progressing. 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 Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation. The S&P Global Purchasing Managers' Index data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies. The Institute of Supply Management Manufacturing Index, also called the Purchasing Manager's Index, measures manufacturing activity based on a monthly survey, conducted by the Institute for Supply Management, of purchasing managers at more than 300 manufacturing firms. The Conference Board is a nonprofit research organization that distributes vital economic information to its peer-to-peer business members.
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