THE BREW – JUNE 2024

BIFURCATIONS ABOUND

The US economy is currently expanding at a moderate pace, with the S&P 500 hitting new highs. At a macro level, everything seems calm: equity volatility is at its lowest in years, and job growth remains robust. However, beneath the surface, signs are emerging that not all segments of society are benefiting equally.

In our September 2023 edition of “The Brew,” we highlighted a significant trend: approximately $6.3 trillion is now held in household and business checking accounts, up from $2.3 trillion pre-COVID. Despite expectations that higher prices and elevated interest rates would deplete these reserves, balances have actually seen modest increases over the past nine months.

While this suggests overall financial health among businesses and consumers, disparities persist. A notable indicator is the rising percentage of credit card delinquencies, recently reaching a 10-year high. Although still historically low and not alarming, it underscores that not everyone has ample savings.

Similar disparities are evident among publicly listed companies. Comparing earnings growth since December 2021, large cap companies have outperformed small cap counterparts. Small cap firms typically carry more debt relative to their size, making them more vulnerable to higher interest rates. Year to date as of June 12, 2024, the S&P 500 has risen by 18.6%, whereas the S&P 600 (an index that tracks small cap stocks in the US) has declined by -3.8%.

Large corporations, as revealed in public filings, hold substantial cash reserves. For instance, the six largest companies in the S&P 500 collectively possess as much cash as all companies in the S&P 600 combined.

While the economy appears robust on the surface despite higher interest rates, certain sectors are facing greater challenges. Until the Federal Reserve significantly reduces rates, we anticipate a continued divergence between entities with strong versus strained balance sheets. As investors, it's crucial to focus keenly on the quality of the balance sheets in which we invest. Your SEIA advisor can provide guidance on positioning your portfolio accordingly.

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