The AM Call:  Livin’ on the Edge

• Halfway through the year, and we take a look at the markets so far this year. Equities (S&P 500, up +15.3%) have moved higher for the year-to-date, led by tech (Nasdaq, +18.6%). Away from tech, the move higher has been more modest (DJIA, up 4.8%), but still positive. We encourage clients to recognize that a 5% return for half a year is spot-on with the long-term average annual equity returns while the pace of tech-led gains is likely unsustainable over the long term. We have already cited how market gains are concentrated in a few stocks, and we believe that any break in the trend-line of AI-powered growth could leave the tech-centric indices vulnerable. 

• In fixed income, YTD returns have been positive for shorter maturities (1Y bill, +1.9%) and high yield (2.6%), while longer Treasuries (30Y bond, -5.9%) and the broad fixed income universe (Agg, -0.7%) are both down on a total return basis.
• Looking ahead to the second half of the year, we see several potential flashpoints and risks. The major issue grabbing headlines as we head into the fall will be the U.S. presidential election. Last week’s debate arguably left more questions than answers, but overall it was a win for the GOP. A Trump win in November is likely to bring back more tariffs and an extension (or a permanent adoption) of tax cuts, both of which are more inflationary at the margin. We are not in the business of making political predictions, but if the risks are skewed toward slightly more inflation, this argues for an allocation to TIPS and/or higher nominal equity exposure. As this environment would also imply “higher for longer” rates, we would expect the yield curve to bear steepen and for the U.S. dollar to remain strong.
• Last week, May PCE confirmed the cooler inflation trend shown in May’s CPI. PCE generally runs lower than CPI, and core PCE is the basis for the Fed’s 2% inflation target. Core PCE fell to 0.1% on a MoM basis, from 0.2% in April, while it was up 2.6% YoY vs. 2.8% previously. Both of these figures were in-line with estimates.

• Equities were relatively flat for the week, as expected inflation figures failed to outweigh profit-taking and concern over consumer strength following a few disappointing earnings results. In earnings, Walgreens (WBA) and Nike (NKE) disappointed investors, with both shares falling in excess of 20% for the week as very weak guidance generated growth concerns for the retailers. Micron (MU) also sold off and traded almost 10% lower after posting an earnings beat, but forward revenue guidance failed to raise the bar on high AI-generated expectations. In positive earnings, Carnival Cruises (CCL) and FedEx (FDX) moved higher on combination beats in reported earnings and forward guidance.
• In corporate news, Volkswagen (VWAGY) announced a $1 bn equity investment in Rivian (RIVN) that could rise to as much as $5 bn by 2026, leading to a massive jump in Rivian share price that retreated over half the gains after the EV manufacturer failed to revise its 57,000 annual production guidance for the year following the investment.
• We also got solid news from May Personal income and Spending and Durable goods orders. Personal income rose by 0.5% MoM in May, better than expected, while spending was up 0.2%, also better than expected.  Durable goods orders excluding Transportation rose by 0.1%, compared to the estimate for down

The Week Ahead

• For the week ahead, the most important macro point will be on Friday after the July 4^th holiday with the June payroll report. Nonfarm payrolls are expected to expand by 190,000, compared to 272,000 in May. The unemployment rate is expected to hold steady at 4.0%, while average hourly earnings is estimated to decline to 3.9% from 4.1% YoY and to 0.3% from 0.4% MoM. Any material surprise in the data could lead to big moves as liquidity could be thin following the 4^th of July holiday.

Market Summary – Returns and Yields

For additional insights, be sure to check out last week’s blog post.

Definitions, sources, and disclaimers

Definitions:

• Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
• GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
• The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
• Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
• The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
• The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
• The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
• Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
• Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
• The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
• The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).

Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).

Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.  

Important Disclosures:

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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