Q2 Economic Update 2024: Insights and Trends

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Transcript:

Hello, and welcome, and thanks for joining me. Today, we’re going through our second-quarter economic update. I’m Alex Wolf, certified financial planner and head of financial planning at Base Wealth Management. Today, we’re going to go through a series of information and updates on the state of the economy and where we stand today. So, let’s get into it.

We’re looking here on the slide showing the S&P 500 in the year-over-year earnings per share growth. What we’re noticing is revenue is still growing strong amongst the S&P 500, but the profit margins have started to slow, which is not surprising given the inflation that we saw last year and are continuing to see. That has hit profit margins for most of the companies in the S&P 500, but revenue is still showing very strong growth for those companies.

On our next slide, we’re looking at the price-to-earnings ratio for the top 10 stocks in the S&P 500 compared to the remaining stocks in the S&P, and there are some really interesting data points here. First is how expensive those top 10 companies are compared to the remaining stocks in the S&P; they’re almost 10 times more expensive compared to the rest of the companies and they’re trading above their historical averages by almost or just over eight times, where the remaining stocks are only just under three times more expensive compared to their historical averages.

What is also interesting is the weight of the top 10 stocks in the S&P, showing on that graph in the upper right-hand corner. The top 10 stocks make up much more of the S&P 500 than they have over the last 20, almost 30 years now. If you show that graph and how much more those top 10 stocks make up of the S&P, so there’s a much bigger concentration compared to the last 30 years. So, that’s one thing to keep note of is when you are investing in the S&P, you’re putting a lot of money in those top 10 stocks, which has performed well, and we’ll get into some of that data later on in our update.

Looking at the Magnificent 7, those are basically the seven biggest stocks in the S&P 500. You can see here some dispersion information on growth in their performance and their stock compared to the rest of the S&P 500. They’re significantly outperforming the rest of the S&P, those top seven, which are called The Magnificent 7. So, we can see there some quite different results compared to the S&P 500.

One of the slides, or one of the graphs that I really like here is the bottom right-hand corner, which shows the dispersion within those top seven or Magnificent Seven stocks. So, in 2021, we saw the top of the Magnificent 7 rise 125% and the lowest only increasing 2% in that particular year, and the average was 50%. In 2022, which is not that long ago, but if we remember that was a bad year for the stock and bond market, we can see that the best performing of The Magnificent 7 in that year was down 27%, and the worst performer down 65%, with the average being down 44%. So, not a great year for the Mag 7, and then last year, quite the opposite. In 2023, the best performer, which was Nvidia, was up 239%, and the worst performer, unfortunately, was only up 48%, which is still a phenomenal year, of course, but a big dispersion last year from the worst performer compared to the fast. And now, so far in 2024, we’re seeing a little bit more dispersion again. We’re seeing one of them, Tesla, down 29%, and the best performer, Nvidia again, is up 82%. So, we’re starting to see the Mag 7 spread out again, some being down and some of them being flat, or they’re only up 10% on average. So, quite interesting to see the difference in performance amongst just those seven stocks.

This is also a really interesting bar chart that shows you, on any given year, even when the markets are up, there’s a period where there’s interyear drops that are negative. But out of the last 44 years, 33 of them ended up being positive. And we can see that almost every year, at some point, the markets are negative. So even when things appear to be not doing well, there’s quite a period where they’re actually recovering and coming up from some of those interyear lows.

This shows economic growth here in the US over the last 23 years, and this is going to show you that our economic growth is still very much positive, and the markets are really humming along. What makes up the components of GDP, or gross domestic product, is a lot of consumption by us as the citizens and the people of the US. We

make up a large portion of our economic growth. Government spending is the next largest category, and then investments like us in the stock market are also a big component of growth here in the US.

These are consumer finances, so this is really interesting data when examining our household assets and liabilities. Some of our biggest assets are houses, businesses, pensions, other types of investments, and then our liabilities: mortgages are the biggest debt here within the US, and then we have auto loans, revolving credits, student loans, and other liabilities as well. And that’s starting to tick up. You can see there, it’s still quite low, but we are seeing households take on more debt than we were pre-2020.

On the right bottom right-hand side of the screen, you can see that early delinquencies are also starting to rise for auto and credit card loans, so people are starting to get behind on their payments on credit cards and on their car loans. So that’s also something to monitor, but they are still reasonably low compared to the historical average.

When looking at consumer confidence, this is also a big part of economic data. How are we feeling as a society, in the economy, and the stock market? And it really bottomed out there last summer, being down quite significantly. But consumer confidence is rising, as you can see here on this graph, which is good to see when we think about what’s going on in the economy, wages, and unemployment, and things like that. There’s a lot of positives.

Speaking of which, here is a graph showing unemployment and wages. The blue line is wage growth, which we are starting to see pick back up compared to how it was coming out of the COVID-19 pandemic. It spiked, and then it’s come down, but we’re starting to see it tick up again, which is good to see. And then our unemployment rate, which is that black and gray line, is also really low. It’s under 4% and has been for over 2 years, which is also a good thing as far as economic growth, but it is ticking up just slightly, but it is still below our historical unemployment rate, which is on average just above 6%, and we’re not even at 4%.

This is labor supply. So, when we examine what’s going on with employment, we’re seeing a lot of good information. What’s not good information is when people are spreading misinformation about labor force participation, and you will see people talking about, “Well, no one wants to work anymore,” and that’s just nonsense. It’s really not the case at all. The bottom right-hand graph shows labor force participation for ages 18 to 64 is quite high and is growing, so people that are wanting to work are working, and we’re starting to see those people come back into the market when maybe some of them were laid off or between jobs during the COVID-19 pandemic.

Another interesting thing, and also unfortunately politicized, is the upper right-hand graph showing labor force growth, which is native and immigrant populations. The light blue color on that bar chart shows the foreign-born participation and labor growth here in the US, which is quite a significant part of our population of workers compared to Native or US-born workers. So that’s really interesting to see, and it just shows you that we rely very heavily on a lot of healthy immigration to supply our workforce, so an interesting graph there.

This is an inflation graph, as you can see here. Inflation is definitely starting to come down compared to where it peaked last summer, which is good to see, but it definitely has been more sticky compared to how quickly we thought it may come down. And this is a big factor in when the FED is going to hopefully attempt to start lowering interest rates, but as inflation proves to be more sticky, they’ve delayed some of those rate cuts, and we’ll see how many we actually end up getting here in 2024. But this is an interesting chart that shows you that spike in you know from 2020 to 2022 in inflation, and it breaks it down between core CPI, food, and energy in there as well.

This is a chart showing the inverted yield curve, so right now on the far left-hand side of this, you can see interest rates on short-term treasuries are higher than long-term. What’s going to happen, or once they are able to start reducing interest rates, is the left-hand side, the short-duration treasuries will be impacted the most and very quickly and get it back to a normal yield curve where you’ll have lower interest rates on short-term debt compared to long-term. So once they start cutting rates, you’ll see a rapid decrease in the left-hand side of this chart.

This is an asset allocation and asset class return chart, so this is showing different each different colored square represents a different asset class, so you’ll have large cap, small cap, you’ll have real estate, you

‘ll have money markets, you’ll have cash and commodities, and this shows you that any given year, certain asset classes will outperform or underperform other asset classes, and then the white squares and where it’s also outlined, it shows you an asset allocation of 60% stocks and 40% fixed income or bonds and how that typically has a very nice return on any given year, but when you look at years like 2022, Commodities did the best, and real estate and small cap really did not do very well where last year and this year, the charts look somewhat similar with large cap leading the way, and we’re starting to see a drag year to date on that far right column where cash and fixed income are not you know they’re not doing great, but that’s kind of what they historically do, they’re not a big addition to the portfolio or growth when talking about fixed income in cash, so it’s been a good thing to have money invest in large cap stocks over these last two years.

Then we have a really interesting chart and graph about investing at all-time highs, which we continue to do. I found this really fascinating. Over 6% of the time are all-time highs in the SNP500, quite staggering, and then almost 30% of that time, that new all-time high acts as the floor. So, this really goes to show you that just because it’s at the market or the S&P is at an all-time high, it’s still a good time to be investing because there’s almost six over six % of the time the Market’s trading at all-time highs. On the right-hand side, it shows you if you invested on any other day versus at a new high, and you’re actually better off investing at that new high because of the momentum of the market and the likelihood that that’s going to be the new market floor, so often times investors get scared and timid about investing money when the Market’s really doing well and we keep hitting these all-time Highs, but it’s way more common than you actually think and it is yes a good time to be investing even when the markets are at highs.

This shows a time in diversification in terms of volatility of returns, so you can see how volatile the green is, which is stocks on a one-year return basis compared to a 20-year rolling return, the gray bars represent a 60/40 portfolio, which you can see kind of shrinks down that volatility but also provides provides you a stable return when looking at you know 5, 10, and even 20 years out, so sometimes it can feel a little rough when you’re experiencing these volatile returns in the stock market but when you look at the average returns over many years they are almost always positive.

Lastly, is market returns around the end of a Fed rate height hike cycle, so you can see here our chart is the the red one, so you can see that’s our line here in 2023 compared to our last rate hike compared to other years following a series of interest rate hikes and following the same Trend you can see that the market returns are in the upward trajectory and we’re also experiencing that, but it also shows you is that there’s a very low low likelihood of a recession following a series of rate increases not saying it hasn’t happened, it happened in the mid-2000s and in the 80s but in general when looking at other similar markets they are all positive coming out of an interest rate hike cycle so there you have it there’s kind of our brief update on the second quarter of the economy if you found this video interesting and you want to hear more content please check out Bas wealthmanagement.com And subscribe to our Channel channel for future updates.

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