Week in Review: May 31, 2024

June 3, 2024

Recap & Commentary

Markets ended the week relatively unchanged as investors seemed to take a wait-and-see approach as to what comes next for the markets. Since its recent low in October, the S&P 500 has gained over 25%, aided in no small part by expectations of multiple Fed rate cuts in 2024. Now, however, with progress on returning inflation to the Fed’s longer-term target of 2% slowing and economic growth generally remaining resilient, those expectations have largely evaporated. In addition, the S&P 500’s recent rally has left its price-to-earnings (PE) ratio well above its longer-term average. The heightened valuations have left the market looking less attractive, especially without an obvious catalyst to boost them higher, i.e. multiple Fed rate cuts.

Should inflation indeed begin to show progress again in 2Q24 of moving closer to 2%, that would likely provide a tailwind to markets. Other economic data will also play a role, particularly readings on employment, consumer sentiment and business activity such as ISM and PMI data. Data showing slowing conditions would likely be welcomed by investors as a catalyst for Fed rate cuts.

This upcoming week the government will release May employment figures.  Current expectations are that the economy added 185K nonfarm jobs during the month. In 2023, monthly nonfarm payroll additions averaged 251K. Through the first four months of 2024, the monthly average dipped only slightly, to 246K.  A strong report would support the notion that an imminent recession is unlikely.  However, a report that significantly exceeds expectations would likely fuel further concerns that the Fed might no cut rates at all in 2024.

Economic Commentary

Core personal consumption expenditures (PCE), the Fed’s preferred inflation measure, rose 0.2% in April, better than the expected 0.3% pace which was also recorded in March. Compared to a year ago, core PCE rose 2.8%, inline with estimates and unchanged from March’s pace. During the last four months of 2023, core PCE fell from 3.6% to 2.9%.  Since then, it has fallen just 0.1%. For a Fed that has expressed concerns about inflation becoming entrenched, the lack of more rapid progress towards its 2% inflation target is unlikely to provide the Fed with the comfort needed to entertain interest rate cuts in the near term.

Consumer confidence rose in May for the first time in four months, boosted by improvements in consumers’ views on current and future economic conditions. Concerns about inflation continue to weigh on consumers, as evidenced by one-year inflation expectations which ticked up 0.1% to 5.4%.

First quarter GDP was revised downwards from 1.6% to 1.3% due in large part to consumer spending which, according to the revised data, grew 2% during the quarter, down from the initial estimate of 2.5%.

Pending home sales fell nearly 8% in April, their largest monthly decline in over three years, corroborating the weakness seen in April existing and new home sales reported the prior week. The pending home sales index ended the month at its lowest level since its record low set in April 2020. As with other housing market data, higher mortgage rates were cited as the primary culprit.

Of Note

A busy week for mergers and acquisitions (M&A) activity saw T-Mobile announce a deal to acquire regional wireless carrier U.S. Cellular for $4.4B while ConocoPhillips announced a deal to buy Marathon Oil for $22.5B.

Market Indices   (As of 05/31/2024)

The Week Ahead

• May Employment Report
• ISM Manufacturing
• ISM Services
• JOLTs
• Consumer Credit
• Weekly Jobless Claims