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Monthly Economic and Investment Outlook

July 2024 Economic and Investment Outlook

United States

stock market bull statue
  • The U.S. economy generated 206K jobs in June. The three-month average is 177K, below the twelve-month average of 220K, signaling a cooling job market. Job gains occurred in government, healthcare, social assistance, and construction sectors. The unemployment rate rose to 4.1%, from 4.0% in May. Average hourly earnings rose 3.9% y/y vs 4.1% last month.
  • The June ISM manufacturing index remained in contractionary territory for the 3rd consecutive month at 48.5%, down from 48.7% in May. The ISM services index unexpectedly dropped to 48.8% in June, from 53.8% in May, and well below the consensus estimate of 52.7%. It was the lowest reading since May 2020.
  • In Q1, real GDP rose 1.4% on a seasonally adjusted annual rate (SAAR). Q2 is currently tracking at 1.5%, roughly half the pace of 2023, and below the Fed’s longer-run GDP growth rate projection of 1.8%. Is the U.S. economy experiencing a growth recession, where the economy continues to expand, but at an insufficient rate to keep unemployment from rising?
  • Consumer total debt balances stand at approximately $17.6 trillion as of Q1 2024, with 70% of that debt being denominated in mortgage debt. Most of the outstanding consumer debt in the U.S. is fixed rate.

    Cosumer Total Debt Balance 

     

  • May’s headline Personal Consumption Expenditure (PCE) price index dropped to 2.6% y/y, compared to 2.7% in April, perhaps on its way to the Fed’s 2% target. Core PCE dropped to 2.6% from 2.8% y/y the previous month.


    Headline PCE Inflation
       

  • Interesting observations from Strategas:
    • An Artificial Intelligence search uses 10x the amount of electricity than that of a google search.
    • The U.S. Energy Information Administration (EIA) expects global electricity usage from data centers to increase by 540 terawatts from 2022 to 2026, roughly one year of electricity usage in Japan.
    • Despite government subsidies, natural gas provides 10x the amount of electricity to the American power grid than does solar.
    • Coal still generates 16% of America’s electricity, according to the EIA.

Global

  • 2024 began with the consensus expectations of a weaker U.S. dollar based on deteriorating U.S. fiscal and trade deficits, and a narrowing interest rate differential with other major economies. However, halfway through the year, the dollar index (DXY) has gained approximately 4.5%. Resilient growth and stubborn inflation in the U.S. economy delayed rate cut expectations.
  • The Japanese yen has depreciated more than 14% this year against the U.S. dollar, nearing 37-year lows, as there is much uncertainty surrounding the Bank of Japan’s monetary policy in support of its currency.
  • Higher-for-longer interest rates in the U.S. may continue to support a stronger-for-longer U.S. dollar, particularly as central banks of other countries are moving ahead of the Fed to cut interest rates.
  • The eurozone’s June headline Consumer Price Index (CPI) grew 0.2% m/m and slowed to 2.5% y/y. However, core CPI jumped 0.4% m/m, and held steady at 2.9% y/y. Services CPI rose 4.1% y/y, most likely giving the European Central Bank some pause for them to cut key interest rates at their July 2024 meeting.

    Eurozone Core CPI

          

  • Political and economic uncertainty has increased in both France and the U.K., owing to the results of recent elections. In France, the hung parliament may result in policy paralysis, delaying fiscal consolidation, and preventing any meaningful reforms until the next presidential election in April 2027.
  • In the U.K., the general election resulted in a landslide victory for the Labour Party. It was the largest election victory for the Party since former Prime Minister Tony Blair’s landslide win in 1997. The key concern now is the Labour Party’s handling of taxation and spending, and the impact their new policies will have on economic growth.
  • The eurozone’s PMI composite index edged down in June to 50.9%, from 52.2% in May. Weaker manufacturing output was the key factor. The services PMI also slipped, but at 52.8% still indicates moderate growth.

    Eurozone Composit PMIs

    Source: Oxford Economics/S&P Global
       

Fixed Income

  • The minutes of the Fed’s June 11-12 meeting showed several of the participants remarked that monetary policy should stand ready to respond to unexpected economic weakness. Fed officials are looking for a slowdown in wage growth, reduced pricing power by businesses, and increased consumer sensitivity to price increases. These developments would support their expectation that inflation would continue to decline over the coming year.
  • It is important to remember that the Fed raised rates at the fastest pace in 40 years in 2022 and 2023. The goal was to reduce a four-decade high level of inflation to more historic levels. The Fed has held the benchmark fed-funds rate in a target range of 5.25% - 5.50% since July 2023.
  • In November 2023, Moody’s lowered its outlook on the U.S. credit rating to ”negative” from “stable”, citing large fiscal deficits and a decline in debt affordability. Moody’s forecasts that the annual interest expense on U.S. debt as a percentage of tax revenues will exceed 26% in 2032, about the same level as a CCC rated corporate credit.

     
    Time Required to Reach US Debt
     Source: Strategas


  • The U.S. currently has total debt of $34.6 trillion, $24.9 trillion is marketable to the public. The weighted average interest rate of marketable debt is 3.26%, well below interest rates at every part of the yield curve. Roughly 55% of the U.S. marketable debt matures in the next three years.

    US Outstanding Marketable Sovereign Debt 
     Source: Strategas

  • The lack of certainty and clarity in the direction of interest rates, both in the intermediate-term and longer-term, reinforces our decision to remain benchmark neutral in duration in our fixed income investment strategies.

Tactical Fixed Income Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, defensive, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by a stronger U.S. Dollar and slower economic growth.
  • Slight exposure to gold, to serve as a hedge, in a geopolitically tense global environment.

Equity Market

  • Equity markets posted strong, but uneven returns, in the first half of 2024. As of June 30th, the NASDAQ was the clear winner, posting a return of 18.6%, followed by a return of 15.3% for the S&P 500. The laggards were U.S. Small Cap stocks, up 1.7%, the Dow Jones 30 up 4.8%, International Developed up 5.7%, and Emerging Markets up 7.7%. Growth outperformed value, rather significantly, in all U.S. equity asset classes.
  • According to Argus Research, since 1980, there have been 16 first-half periods during which the S&P 500 gained at least 10% (the average gain was 15.8%). The average S&P 500 return in the second half of those years was 7.3%. There are no guarantees that stocks will continue to climb throughout the remainder of the year. In 3 of the 16 years, the S&P 500 fell during the second half of the year.
  • Since the start of the bull market on October 12, 2022, the S&P 500 is up 56%, led by the 119% increase in the S&P MegaCap–7 (Apple, Amazon, Microsoft, Meta, Nvidia, Alphabet, and Tesla). The S&P 500, excluding the MegaCap-7, is up 36% since the start of the bull market.

          
    S&P vs Nasdaq
           

  • According to Strategas, the performance gap between the market cap weighted S&P 500 and equal weighted index has only been this wide in two other cycles – the late 1990s and the late 2010s. Reversals from such wide gaps are often quick and significant. However, the timing of such a reversal is unpredictable. For long-term investors, diversification is a prudent investment strategy in the large cap universe.



    Rolling 12Month Return

  • The 10 largest stocks by market cap in the S&P 500 make up 38% of the index and 31% of net income.

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, defensive, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by a stronger U.S. Dollar and slower economic growth.
  • Slight exposure to gold, to serve as a hedge, in a geopolitically tense global environment.
Notices & Disclosures
Past performance is no guarantee of future results. Products and services offered through F.N.B. Investment Advisors, Inc. are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value. The material has been extracted from various sources that F.N.B. Investment Advisors, Inc. believes reliable, but we cannot guarantee the accuracy or integrity of the material. This material is for your private information, and we are not soliciting any action based upon it. Any projections, market outlooks or estimates contained herein are forward-looking statements and are based upon certain assumptions. Other events that were not considered may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with their investment advisor. You can review your registered investment advisors or the investment advisory firm at the SEC's Investment Adviser Public Disclosure page - http://www.adviserinfo.sec.gov/IAPD/Default.aspxRedirect icon.

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