The U.S. economy continued to show resilience during the second quarter as major stock indices held onto meaningful year-to-date gains. Profit reports for companies in the S&P 500 were positive to begin the year and are expected to rise another 9% in the second quarter as earnings results get underway. In Europe, where tourism accounts for about 10% of the overall economy, business activity has been notably strong. In fact, the UN is forecasting 2024 to be the strongest year for tourists since 2019, which bodes well for consumer-facing European companies.
Encouraging inflation reports in May gave investors hope that the Federal Reserve is on the right track in orchestrating a “soft landing” for the U.S. economy. To elaborate, Fed Chair Jerome Powell’s top policy goal has been to defeat inflation by carefully slowing the economy, while at the same time avoiding a recession in the United States. Adeptly, the Fed has so far succeeded in bringing inflation down to 2.6% (as reported in May via the Personal Consumption Expenditures Price Index) while still allowing for a healthy job market. In fact, 206,000 jobs were added in June, extending one of the strongest employment periods on record dating back to the late 1960’s (i.e., longest stretch with a sub 4% unemployment rate).
From a risk management perspective, investors are disheartened that market concerns from 2023 still linger today. Overseas, military conflicts persist in the Middle East and in Eastern Europe with no end in sight. Secondly, as it relates to the strong U.S. stock market, most of the price appreciation continues to be derived from a narrow group of stocks. In fact, through June 30th, approximately 55% of the gains in the S&P 500 came from just five stocks, while one stock accounted for almost a third of the overall benchmark return. Investors are hoping for resolutions to both issues by way of a reduction in geopolitical tension internationally combined with a more durable and inclusive bull market for stocks.
On the political front, spirited elections recently took place in France and Germany, while Americans will be conducting their first Presidential rematch since the 1956 contest between candidates Eisenhower and Stevenson. As it relates to the European elections, voters have voiced their displeasure over weak economic growth, out of control budget deficits, and rising inflation, thus opening the door to new coalitions and a change in course for both countries. Politically speaking, we continue to believe that investors will be well served to keep their political views separate from investment decisions. This is not to downplay the importance of geopolitics, however, as political contests do indeed shape the future direction of national policies like corporate taxation, trade agreements, and business regulations, amongst other things.
