INVESTMENT NEWS JULY '24
Economic Growth Disappoints Again
The US economy shows mixed signals amid rising interest rates and inflation concerns.
What’s happening:
- Sluggish Growth: The US economy underperformed in the second quarter despite initial expectations.
- Recession Indicators: Key indicators like the Conference Board Leading Economic Index (LEI) and an inverted yield curve suggest a looming recession. Historical patterns show that recessions typically occur 24 months after a rate hike; it's been 27 months now.
- Inflation Woes: Persistent inflation remains a challenge, driven by regionalization, militarization, environmental costs, and high government expenditure.
Learn more:
- Historical Context: The Great Recession began 42 months after the first rate hike, indicating prolonged periods without a recession can lead to deeper economic downturns.
- Investment Insights: The first half of 2024 favored equities over bonds, with silver outperforming other assets, though equities historically provide the best inflation protection.
- Corporate Resilience: S&P 500 companies have largely withstood rising interest rates.
Further information:
- According to initial calculations by the Atlanta FED, US economic growth disappointed again in 2024's second quarter.
- Despite this, the US economy continues to withstand key leading indicators such as LEI and the inverted yield curve, which have long predicted a recession.
- Historically, a US recession occurred an average of 24 months after the first rate hike. Today, 27 months have already passed.
- Often, the longer a recession did not materialize, the greater the excesses were and the deeper the recession. For example, the Great Recession only started 42 months after the first interest rate hike.
- The disadvantage of the US's continued relatively strong economic growth is that the FED is still not able to control inflation.
- This is not only a problem in the US, but core inflation is also too high in the UK and the EU.
- Regionalization, militarization, environmental costs, tight labor markets and high government expenditure call for interest rate hikes rather than interest rate cuts.
- It is also worrying that the development of inflation in the US from 2013-2024 is still very similar to the inflation from 1966-1982.
- The first half of 2024 was perfect for investors who avoided bonds. The return on US Treasuries starkly contrasts with the return on the S&P 500.
- Even more than gold, silver was the star performer in the first half of 2024.
- However, over the past 50 years, equities have largely outperformed other asset classes, such as bonds, commodities and real estate.
- In particular, the inflation adjusted returns of gold, oil and copper are disappointing.
- Corporate profits and, therefore, equities have historically offered the best protection against inflation in the long term.
- The sharp rise in interest rates since 2022 has not affected S&P 500 companies. Many large companies even appear to benefit from it.
ECONOMY
After the moderate economic growth in the US in the first quarter of 2024 (1.4% annualized), growth appears to have also been modest in the second quarter (1.7% annualized), according to initial calculations by the Atlanta FED. Nevertheless, the economy continues to beat leading indicators, whereas the LEI and the inverted yield curve have been predicting a recession for some time. In the past, a US recession occurred on average 24 months after the first Fed rate hike. It has now been 27 months. The main exception was the Great Recession of 2007/8, which only started 42 months after the FED's first rate hike. In the past, the longer the recession was avoided, the greater the excesses became and the deeper the recession ultimately was.
The disadvantage of the relatively strong economic growth in the US is that the FED has still not managed to get inflation under control. This is not only a problem in the US (3.4%), but core inflation is also still too high in the UK (3.5%) and the EU (2.9%). Due to regionalization, militarization, environmental costs, tight labor markets and high government expenditure, calls rather for interest rate increases instead of decreases.
It is also worrying that the inflation in the US from 2013-2024 is still very similar to the inflation from 1966-1982. Although the world is now less dependent on oil than back then, the geopolitical unrest is at least as huge. Recent elections in France and the UK, and possibly in the US later this year, confirm that the world order is rapidly changing.
Financial Markets
After the excellent performance on equities in the first quarter of 2024 (S&P 500 +11%), we were guided in the second quarter by the old stock market wisdom “sell in May and go away.” Although our advice to temporarily invest in gold (+4%) and cash (+1%) did not yield bad returns, the return on shares was at least the same (S&P 500 +4%) to better (Nasdaq +8%). The return on government bonds was negative in almost all countries. Therefore, the first half of 2024 remains exceptionally good for investors who avoided bonds. The return on US Treasuries (-1%) is in stark contrast to the return on the S&P 500 (+15%). Even more so than gold (+13%), silver (+22%) was the star performer in the first half of 2024. Yet, a return chart over the past 50 years shows that equities outperformed other assets, such as bonds, commodities, and real estate. In particular, the inflation adjusted returns of gold (+1.7%), oil (-0.1%) and copper (-0.3%) disappoint.
Historically, corporate profits and, therefore, equities offer excellent protection against inflation in the long term. In addition, S&P 500 companies still appear to be hardly affected by the sharp increase in interest rates since 2022. On the contrary, many large companies have large cash positions on their balance sheet, which means that, unlike many smaller companies, they benefit from the increase in interest rates. This higher interest rate works strongly to the advantage of companies with a healthy balance sheet and the disadvantage of companies with a lot of leverage.
Disclaimer:
While the information in the document has been formulated with all due care, it is provided by Trustmoore for information purposes only. It does not constitute an offer, invitation or inducement to contract, and the information herein does not contain legal, tax, regulatory, accounting or other professional advice. Therefore, we encourage you to seek professional advice before considering a transaction described in this document. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document. The text of this disclaimer is not exhaustive; further details can be found here.
