Portfolio Manager Commentary

August 1, 2024

Economic Outlook

July ISM Manufacturing Index came in below expectations at 46.8 v. consensus estimates of 48.9 and June’s reading of 48.5, marking the lowest reading since November. US construction spending fell 0.3% month over month vs 0.2% increase consensus. The employment index came in at 43.4, the lowest since June 2020, down from 49.3 last month. The initial claims are above expectations, and highest in close to a year, posting at 249k with a 235k consensus. Continuing claims came in higher as well, at 1,877k v. 1,859k consensus. US Q2 productivity came in at 2.3% and Q2 labor costs were at 0.9%, below consensus. Overall, a slight weakening of economic indicators, dovetailing with the market’s expectations regarding the Federal Reserve.

Fixed Income

The July’s meeting, the Fed kept the federal funds rate target unchanged at 5.25-5.50%. The commentary and press conference following the meeting now has the market pricing in a 100% chance of a rate cut in September, up from a 65% chance earlier in July, according to the CME FedWatch. The intermediate portion (2 – 5 YR) of the yield curve has declined 50 bps in the past month, pricing in expectations of lower rates. The markets is pricing in three cuts by the end of 2024, taking Fed Funds to 4.50-4.75% by December. Of course, expectations don’t always line up with reality, and the Fed will be keen to keep on eye on CPI and unemployment before making any decisions.

Yield Curve

Current Generic Bond Yields

Equity

For most of 2024 the S&P 500 has vastly outperformed other indices, particularly small cap, mid cap, and international stocks. The past couple of weeks however, the gap in performance has narrowed sharply. The Russell 2000 (small caps) went from underperforming the S&P 500 by double digits through June, to being within 5% of large cap returns. While technology stocks have led the charge this year other sectors started to join in the momentum. Sectors such as real estate, regional banks, and homebuilders have sharply improved in price trend and are contributing to additional market breadth in the index.

Year to date, the best performing sectors have been Information Technology (+25.08%), Communication Services (+20.85%), and Financials (+16.14%). The worst performing sectors this year have been Materials (+7.58%), Consumer Discretionary (+6.95%), and Real Estate (2.68%).