Inflation remains high.
Interest rates remain high.
Consumers remain skeptical.
“The year has played out pretty close to what we anticipated,” noted Alan McKnight, Chief Investment Officer at Regions. “Inflation is still pretty high, not yet down to the Fed target. It took the elevator up but is taking the escalator down, so it has been a slower than expected process.”
McKnight explained that this is why rates have remained steady, despite the forecasted rate cuts that were predicted at the outset of 2024. Rather than the presumed four to six cuts, he noted that we may be looking at two – but just as likely zero – rate cuts this year.
“Inflation is hard to drive down, and at the same time we have positive news flowing out of employment numbers and earnings,” he shared. “Yes, some losers are out there, but in totality, the S&P 500 has been better than expected. Net-net, it is positive.”
Standouts in the Market
The markets have been on a bit of a rollercoaster for a few years now, bounced around by everything from a global pandemic and supply chain disruptions to inflationary pressures.
But 2024 has seen little to no volatility and the return on stocks has been better than predicted.
McKnight pointed to a few sectors that are standouts in the market.
“Thematically tech has continued to do well, as have communications services companies that are ‘tech-like’ companies,” McKnight said. “The energy and financial services sectors are performing better than expected. The cyclicals that struggled in 2023 are doing better in 2024.”
Consumers are Struggling.
When asked how consumer sectors were fairing, “not good” was the general perspective for low-income consumers. Earnings reflect that sentiment, with several big-name consumer companies floundering a bit and exploring ways to boost sales. With inflation putting pressure on the cost of goods and services, consumers are obviously skeptical of how and where they are spending their hard-earned cash.
Recent headlines show that some consumer brands are listening and in response are creating value packages to re-appeal to their money conscious customers.
Even some of the lower cost stores are having to raise prices as a result of inflation, bringing middle class-income earners out of the department stores and into the lower cost options, but potentially pushing their low-income customers out of the market.
“Consumer staples suffer because wages and commodity costs remain high, and it is hard to raise prices for the consumers,” said McKnight. “Consumers are switching from name brand to generic.”
This is happening in grocery stores, as well, at least in some geographies.
“Depending on the grocery store, in low-middle income areas, grocery stores have seen a challenge in sales and people are migrating to other areas or delaying purchases,” McKnight noted.
What’s Happening Across the Pond?
Things are getting better in the Eurozone, McKnight noted as inflation is coming down, but they are also growing at a lower rate. In South America, it is a similar story. Brazil is doing better because it is largely a commodity-based economy.
From a bigger picture perspective there are still a number of international influences on the markets today, including the war in Ukraine, the unrest in the Middle East, and China’s relations with both the U.S. and Eurozone. All of these things are creating some unease in the markets according to McKnight, who recently joined Barry Bobrow, head of Credit Markets in Regions Business Capital and host of the Secured Finance Network’s In the Know podcast, to talk about the state of the markets.
“As much as we’ve seen some nice returns on a year-to-day basis out of developed international markets, there still is a bit of a guardrail on that because of some of the macro right now,” McKnight told Bobrow. “It certainly makes it more challenging from a trade perspective, which ultimately is going to impact GDP.”
Bobrow noted that the markets seem to be looking at these various issues as if they are contained, or at least not contagion, and markets are reacting very positively.
McKnight agreed.
“You look at, at least the U.S. markets reaching new highs on a couple of different indices. You look at the Nikkei, finally reaching a new high after over thirty years of doldrums. The Eurozone is doing well from an equity market perspective. Even the EM world is doing well on a relative basis compared to the last couple of years. So, it does look like the equity markets are looking past a lot of this macro. If anything, I think some of it is the belief that there will be some resolution through all of this, and the fact that economies haven’t gone over the cliff.”
What’s Next?
“We should still eke out some gains in the second half of the year,” said McKnight. “But I don’t see a big rally.”
Going into the election season, we may begin to see more volatility as the markets are often more reactive to political fodder. The election cycle will also likely have an impact on Fed decision on rates.
“The Fed will eventually cut rates, but the closer we get to the election, the less likely it is that we will see a rate cut,” McKnight speculated. “But we do expect bond returns to improve as inflation drops.”
A frequent guest on national finance markets broadcasts, McKnight appeared on CNBC Money Movers on May 28 where he pointed to the opportunities in the market as the Fed continues to hold interest rates steady.
“One of the best times to invest in the market is when you’re in the pause, not after a cut,” McKnight told the Money Movers hosts. “It’s a little counterintuitive, but if you look at the data, the best returns are typically during that pause period.”
McKnight also joined CNBC’s Frank Holland on Worldwide Exchange in May where he shared his insights on rallies in the stock market and the broadening of the market to include positives out of the technology, healthcare and financials sectors.
“You have the play the ball where it lies,” said McKnight, quoting pro golfer Bobby Jones. “We think the economic data is going to drive the short-term momentum in the market, but we believe if the FOMC holds steady and we don’t get any major macro events, we could hold through this for the summer.”
Alan McKnight is the Chief Investment Officer for Regions Asset Management, part of Regions Bank Wealth Management where he is responsible for developing consistent and comprehensive asset management strategies to meet the needs of individuals, families and institutional clients.
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