In This Month's Issue:
You can read the full Investment Perspectives here.
The Means of Consumption
Mark Luschini, Chief Investment Strategist
Consumption accounts for over two-thirds of U.S. economic activity. Over the years, we have focused on the consumer in many of our reports, reasoning that it offers the best vantage point from which to take a litmus test about the economy’s health. Our conviction that the consumer was in good financial shape drove the bullish take we expressed in our Annual Outlook published at the end of 2023. After all, consumers had a stiff tailwind in the form of job stability, wage growth, and an abundance of excess savings.
Fast forward to today, and the tailwind has lost some of its velocity. Consider, for instance, that households can draw from three income buckets to fund consumption: past income they haven’t yet spent (savings), present income (compensation and investment income), and future income (accessed by borrowing). Past income has been a potent driver of consumption since households began drawing down their excess pandemic savings in earnest at the beginning of 2022. Excess pandemic savings are a finite resource, however, and the most recent analysis produced by the San Francisco Federal Reserve argues that from its peak of more than $2 trillion in late summer of 2021, it is fully depleted at this juncture. If that is the case, then present and/or future income will have to fill the void if consumption growth is going to maintain its current heady pace.
Stuck Above Neutral
Guy LeBas, Chief Fixed Income Strategist
The neutral rate of interest, often referred to as r*, is the theoretical interest rate at which monetary policy is neither stimulative nor restrictive to the economy. In other words, the short-term interest rate is expected to prevail when the economy is at full strength and inflation is stable. For the United States, estimates of r* provide meaningful insight into the proper stance of monetary policy and have significant implications for various financial markets.
In recent years, discussion around r* gained prominence as the Federal Reserve (Fed) embarked on an aggressive rate hike cycle and, in the year since, a period of policy stability. After raising rates by roughly 5% in just over 12 months, Federal officials began to indicate that policy was approaching a “sufficiently restrictive” level. At the same time, measures of inflation receded from 40-year highs, job growth slowed, and recession chatter emerged as a primary topic of conversation among economists. These are precisely the conditions in which estimates of r* are most useful, as they help guide monetary policymakers to an optimal economic outcome.
Is There a Cap to the Gap?
Gregory M. Drahuschak, Market Strategist
The final line of May’s Investment Perspectives said the high for the S&P 500 is still ahead, and indeed it was, as the S&P 500 posted its eighth-best May result since 1950 and set multiple all-time highs along the way.
NVIDIA (NVDA) became the key to sentiment about artificial intelligence. Substantially surpassing the consensus earnings estimate, declaring a 10-1 stock split, and announcing its first ever cash dividend strongly reaffirmed its role in this rapidly evolving technology. This, in turn, added to the Technology sector’s significant performance this year after topping the S&P 500 (SPX) for all of 2023.
