2024 Week 28

The market is now pricing in a 78% probability of a Fed rate cut in September, up from 64% a week ago and 50% a month ago. This increase is due to four main factors: the rising unemployment rate, which in the U.S. increased to 4.1% in June, the highest level since November 2021; the slowing jobs growth, with the year-over-year job growth rate now at 1.7%, the slowest since March 2021; the slowing wage growth, with average hourly earnings growth having decreased to 3.9%, the slowest since May 2021; and the cooling inflation, as the Fed's preferred inflation measure, Core PCE, decreased to 2.6% in May, the lowest since March 2021.

Despite the Fed's restrictive monetary policy, the S&P 500 is 28% higher than when rate hikes began in March 2022. The index hit three new all-time highs last week, bringing the total for the year to 34. It is on track to be the third-highest year in history, behind only 1995 and 2021. The S&P 500's 16.7% gain in 2024 is the 12th best start to a year and the best start to a presidential election year in history. However, small caps are down 2% for the year, trailing large caps by the widest margin since 1998. Large growth companies like Nvidia (up 154%) are driving the market, resulting in the highest growth stock outperformance over value stocks since March 2000, the peak of the dot-com bubble.

Investor sentiment is growing increasingly bullish. The Investors Intelligence survey shows that the percentage of Bulls is at 63%, the highest since April 2021, above 97% of historical readings. Additionally, active managers' (NAAIM survey) equity exposure has averaged over 100%.

Apple's Price to Sales ratio surpassed 9, the highest in its history and three times higher than in early 2019. This high valuation reflects broader trends in large cap growth stocks, raising expectations as we enter earnings season.

Tesla rebounded from a 43% decline earlier this year to a 1% gain, driven by a 77% rally and strong delivery data for the second quarter (443,956 vehicles). This data exceeded consensus estimates despite a 5% year-over-year decline.

While the stock market thrives, economic indicators show weakness. The ISM Manufacturing PMI has been below 50 for 19 of the last 20 months, similar to the recessions of 1990-91 and 1981-83. The ISM Services PMI is also below 50, at its lowest since May 2020. The Atlanta Fed's GDP projection for the second quarter is now 1.5%, down from 3% a few weeks ago.

The housing market sees increased supply and price drops. Recently, 6.9% of homes for sale had a price drop, the highest on record since 2015. Active listings have increased 18% year-over-year to the highest levels since 2022.

Increased apartment supply leads to lower rents. Only 47% of newly constructed apartments were rented within three months, the second lowest in 12 years. Vacancy rates are the highest since August 2020, and rental prices have decreased 0.7% year-over-year, marking the 13th consecutive month of decline.

Some interesting statistics: the unemployment rate is now 0.7% above the cycle low from April 2023, historically occurring two months after the start of a recession; the labor force participation rate among 25-54 year-olds is 83.7%, the highest since February 2002; manufacturing construction spending has hit new record highs, tripling over the last three years; and Truflation's real-time inflation gauge is below 2%, well below the consensus estimate for the next CPI report (3.1%).