The US economy shows mixed signals amid rising interest rates and inflation concerns.
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.
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.
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