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  • Writer's pictureDaniel Wildermuth

Market Commentary | July 2024



Wildermuth Commentary July 2024
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Markets Continue Up on Strength of Magnificent Seven


June rewarded many investors again with solid and relatively uneventful advances, driven by the “Magnificent Seven” stocks.* Three respected analysts with large investment banks upgraded their forecasts in June for the S&P 500 amid early signs that investments in artificial intelligence (AI) are fueling earnings growth at the large technology companies.

In addition, optimism regarding future market gains is also growing as some see the technology giants possibly extending their gains to other corners of the market through boosting productivity and economic growth. Given that more than two-thirds of the S&P 500's nearly 15% gain this year is attributed to the Magnificent Seven stocks, broader profitability gains would be welcome news to investors.


A recent report from the Commerce Department highlighting slow retail sales and slower than expected GDP growth during the second quarter was welcomed by investors. While falling into the “bad news is good news” category, the softer than expected data cheered investors hoping for a second rate cut this year.

Despite the recent soft data, steady hiring continues to fuel consumer spending and, in turn, an economic expansion unlike any the U.S. has seen. Employers added 2.75 million jobs over the last 12 months, including 272,000 in May, the Labor Department said in early June. The unemployment rate has been at or below 4% for 30 months, something that last occurred during the Vietnam War in the late 1960s and the Korean War in the early 1950s.

Yet, although unemployment remains low, it’s risen from its post pandemic extreme with the unemployment rate ticking up to 4.0% last month from 3.9% in April. It was as low as 3.4% in April 2023. Also, job vacancies, which soared during the pandemic, have returned to pre-pandemic levels. If they fall much lower, a higher unemployment rate beckons. Yet, so far, labor market imbalances have resolved themselves without a recession.


While ample good news exists, unfortunately much of our economic progress results from borrowed money. America is cruising into an uncharted sea of federal debt and recently began spending more on debt service than on defense. Crossing this threshold has been disastrous for every country facing similar circumstances.


The surge in U.S. government debt isn’t a new phenomenon, but the speed of its growth during peacetime is worrying many economists. In 2008, the U.S. accounted for about a quarter of all outstanding debt issued by the governments of rich countries. Now it accounts for about half.


For equity markets, barring a reversal in spending or a disproportionate increase in productivity, the first impacts are likely higher borrowing costs and increased taxes. Eventually, an inevitable contraction in government spending will also affect corporate profitability. However, for now and the immediate future, the actions of the Federal Reserve and economic strength likely remain the primary stories driving markets.


- Daniel Wildermuth, Portfolio Manager



*Alphabet Inc. (GOOG), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Meta Platforms Inc. (META) - Formerly Facebook (FB), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA), Tesla Motors Inc. (TSLA).


 

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