June 2024 Market Recap

This article aims to provide a market recap, including common terminology and the intuition behind various topics. It is designed to help the average reader expand their knowledge in these areas. 

Market Uncertainty and Monetary Policy

Recently, there has been significant uncertainty within the markets, primarily due to fluctuating interest rates and the Federal Reserve’s (the Fed) policy decisions regarding the federal funds rate. The inflation rate heavily influences the Fed's monetary policy in the economy. One of the most common measures of inflation is the Consumer Price Index (CPI), which tracks the average cost of a basket of consumer goods and services over time.

Despite the policy rate being at a 14-year high since September 2022, the CPI has steadily increased over the past year. This persistent inflation suggests consumers continue to spend robustly, indicating their willingness to pay higher prices. This consumer behavior is a crucial factor preventing the Fed from lowering the policy rate. Lowering the policy rate would free up more capital for spending, potentially causing demand for products and services to outpace supply, which could lead to even higher inflation.

The Fed’s goal is to manage inflation without stifling economic growth. By keeping the policy rate high, the Fed aims to curb excessive spending and bring inflation under control. However, this balancing act creates market uncertainty as investors and businesses try to predict the Fed's next moves and the broader economic implications.

The Inverted Yield Curve

Additionally, we are currently experiencing an inverted yield curve, which is when short-term yields are higher than long-term yields for similar credit risk products. Historically, an inverted yield curve has been a strong indicator of a recession, as it has preceded every recession since 1955.

The reasoning behind the inverted yield curve indicating a recession lies in investors' behavior and expectations. When investors anticipate an economic downturn, they tend to seek the safety of long-term fixed-income products. This increased demand for long-term bonds drives up their prices, which in turn lowers their yields. Conversely, short-term yields rise because investors demand higher returns for shorter-term investments due to perceived economic risks. 

The yield curve typically slopes upwards, reflecting higher yields for longer-term investments due to the risks associated with time, such as inflation and uncertainty. However, when the yield curve inverts, it signals a shift in investor sentiment toward caution and a preference for the safety of long-term bonds. This shift in demand suggests that investors expect slower economic growth or a recession in the near future. They are willing to accept lower yields on long-term bonds in exchange for the perceived safety they offer. As a result, the inversion of the yield curve is often seen as a predictor of economic troubles ahead.

Employment / Non-Farm Payrolls

In May 2024, the U.S. economy saw a significant increase in employment, with non-farm payrolls rising by 272,000 and the unemployment rate remaining stable at 4.0 percent. This vital job growth indicates a resilient labor market, with employment continuing to trend upwards in critical sectors such as health care, government, leisure and hospitality, and professional and technical services. These sectors alone accounted for substantial job additions, reflecting ongoing economic expansion.

Comparatively, a year earlier, in May 2023, the unemployment rate was slightly lower at 3.7 percent, with 6.1 million unemployed persons. Despite the slight increase in the unemployment rate over the past year, the consistent growth in payrolls suggests that the economy is still generating jobs at a robust pace.

Employment trends are a critical indicator of economic health, influencing consumer spending and overall economic activity. The non-farm payroll report provides insight into labor market conditions, helping investors and policymakers gauge the economy's strength and adjust their strategies accordingly. A healthy job market typically supports higher consumer confidence and spending, which are crucial economic growth drivers.

Housing Market

The housing market has experienced notable fluctuations over the past year, influenced by changes in interest rates, supply chain disruptions, and varying demand dynamics. Elevated mortgage rates, a direct consequence of the Fed's tightening monetary policy, have significantly impacted home affordability and buyer behavior.

As the Federal Reserve has increased the federal funds rate to combat inflation, mortgage rates have followed suit, reaching their highest levels in over two decades. The 30-year fixed mortgage rate has remained above 6.5% since May 2023, even exceeding 7.5% at times. This rise in rates has made borrowing more expensive, leading to a decline in mortgage applications and refinancing.

As of June 2024, the housing market shows notable changes compared to a year earlier. The inventory of existing homes for sale increased by 16.3% from the previous year, leading to a higher supply of available homes. The months' supply of existing homes, which measures the balance between supply and demand, has risen to 3.5 months, indicating a more saturated market with houses taking longer to sell​. The rising mortgage rates have decreased home affordability, contributing to a cooling housing market.

Stock Market Performance

The stock market has been a focal point of investor attention, reflecting the broader economic uncertainties and policy shifts over the past year. Major indices have shown considerable volatility, influenced by interest rate hikes, inflation concerns, and geopolitical events.

As of June 2024, the S&P 500 has experienced significant growth, with a year-to-date gain of approximately 12.7%. This increase is driven by solid performances in sectors such as technology and healthcare, which have shown resilience amid economic challenges.

The Dow Jones has seen a more modest year-to-date gain of around 2.7%. This index, which includes major industrial companies, has been impacted by global supply chain disruptions and fluctuating commodity prices​. 

The tech-heavy NASDAQ has continued to perform well, with a year-to-date gain of about 16.4%, underscoring the ongoing investor confidence in the technology sector. This performance highlights substantial gains in companies like NVIDIA, Apple, and Microsoft​. 

The upcoming Federal Reserve meeting on June 11th-12th is highly anticipated, with investors keenly awaiting any signals regarding future interest rate adjustments. The outlook for the rest of 2024 remains cautiously optimistic, with potential for both opportunities and challenges. The Federal Reserve's actions in the coming months will be pivotal, as will broader economic indicators and global events.

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