Commentary

Investors have a lot to digest this week, including the Federal Reserve’s latest policy decision and key May inflation data.

Wall Street was caught off guard on Friday by a much stronger than expected May jobs report that showed a hiring gain of +272,000, about +90k more than forecast, and an increase in wage gains to +4.0% year-over-year from +3.9% previously.

The strong numbers have again stoked concerns that the US economy may remain too “hot” for the Fed to justify cutting interest rates in 2024. Wall Street has walked backed its expectations for rate cuts, with traders now thinking the odds favor only one -25 basis point cut (just over 40%) versus two cuts (just over 35%) this year.

Fed officials will weigh in with their own outlooks in the so-called “dot plot” this week, which maps out where they think the central bank’s benchmark rate will be in the future. The outlook will be released at the end of the Fed’s two-day policy meeting on Wednesday afternoon along with its policy decision.

Wall Street almost universally expects the Fed will leave interest rates unchanged at this meeting but is very uncertain as to how the dot plot might change. While the projections are just officials’ best guesses for where rates might be months or years out - aka they are not set in stone - they can however have a particularly big impact on bond yields.

If officials are predicting fewer rate cuts, that could put more upward pressure on yields, in turn creating more headwinds for the bulls.

On Wednesday morning, before the Fed announcement, the highly anticipated Consumer Price Index (CPI) for May inflation will be released. Most expect to see slowdowns in both headline and “core” (strips out food and inflation) inflation. This report will not have any impact on the Fed’s decision, but it will probably influence the tone of Fed Chair Jerome Powell’s comments on Wednesday afternoon during his post-meeting press conference.

There is nothing of major importance on the US economic data calendar today and no earnings of note either.

Tech bulls this week are anxious to see what Apple introduces during its annual “World Wide Developers Conference” (WWDC) that kicks off today and runs through Friday. Above anything else, investors want to hear details about Apple’s AI plans. It’s been tough for Apple investors to watch the steep stock gains its competitors have enjoyed from their AI offerings while Apple has remained on the sidelines. Apple’s stock is up a little over +2% so far this year versus Microsoft’s nearly +13% gain, and a more than +12% year-to-date gain for the S&P 500. The company has promised to unveil what its been working on during WWDC this week. Should be and interesting week.

Why the Recession Still Isn’t Here:  The recession, predicted by business executives, economists, and investors, refuses to show up. 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. Of course, just because everyone who predicted a recession has been wrong doesn’t mean they won’t eventually be right. Though the unemployment rate remains low, it’s risen from its post-pandemic extremes, the unemployment rate ticked up to 4.0% last month from 3.9% in April. It was as low as 3.4% in April 2023. Already, the rate at which companies hire workers has fallen to levels last seen seven years ago. Job vacancies, which soared during the pandemic, have returned to pre-pandemic levels and if they fall much lower, a higher unemployment rate beckons. So far, labor market imbalances have resolved themselves without a recession. Typically in the recovery from a downturn, households are more cautious about spending and are likely to save. This time, economic activity has been supported more by wealth and incomes than by credit. The pandemic altered spending habits which, together with higher asset prices, solid job prospects and government stimulus, left more households feeling flush. Nothing illustrates the pandemic-era weirdness quite like the U.S. housing market. Higher rates have not only hit demand, they have also blunted supply. Many homeowners with no mortgage or a low-interest rate are unwilling to move.  Source WSJ

U.S. Added +600,000 New Millionaires Last Year:  The U.S. far outpaced the rest of the world in minting millionaires last year, according to a new study. America’s millionaire population grew 7.3% in 2023 to 7.5 million people, according to a report from Capgemini. Their combined fortunes grew to $26.1 trillion, up 7% from 2022. Capgemini defines millionaires as those with investable assets of $1 million or more not including primary residence, collectibles or consumer durables. While interest rates remain higher, the stock rebound at the end of 2023 combined with trillions of dollars in government spending and stimulus continues to power the U.S. wealth machine.The fortunes at the very top of the wealth ladder are growing fastest. The number of Americans worth $30 million or more grew 7.5% in 2023, to 100,000, while their fortunes surged to $7.4 trillion. Globally, ultra-high net worth individuals account for 1% of the millionaire population but now hold 34% of its total wealth, showing the increasing concentration of wealth even among the wealthy. The big question is whether the wealth boom of the past decade, initially fueled by low interest rates and liquidity, and more recently by Covid-19 pandemic stimulus and artificial intelligence, can continue. Global conflicts, elections, interest rates and a potential economic slowdown could all slow the pace of wealth creation, said Elias Ghanem, global head of the Capgemini Research Institute for Financial Services. Source CNBC

The Investing Boom That’s Squeezing Some People Dry: If your financial advisers haven’t yet tried to sell you any “alternative” investments, they might soon. Flogging these assets that aren’t listed on a stock exchange—bundles of real estate, buyout deals, private debt and so on—is one of Wall Street’s biggest obsessions. Just three categories of alternatives—nontraded real-estate investment trusts and business development companies, plus interval funds that permit you to withdraw a portion of your money only a few times a year—raised a combined $55.8 billion in 2023. That was up from $26 billion a decade earlier, according to Blue Vault, a research firm in Cumming, Ga. The idea is that when you lock your money up for months or years, you’re less likely to panic in a downturn, enabling the managers to amass a portfolio that will pay off in the long run. An investment that doesn’t trade may have some advantages, but once you buy it, how do you sell it? How deep a haircut, or discount from the reported price, will you take? Many funds have so far been able to cash out investors at what seems like a fair price. Many haven’t. Often, if you can find a broker willing to buy your alternative investment, the commission can run up to or even exceed 5%. Your haircut could be as deep as 30% to 50%. Depending on the buyer, weeks may go by before you get paid. Source WSJ

As Hospitals Grow, So Does Your Bill: Giant hospital systems are swallowing up big chunks of the country’s healthcare system through vertical and horizontal integration. Hospital executives argue that mergers lead to improved efficiency and better outcomes for patients. But, after years of rampant consolidation between hospitals, most regions in the U.S. are now dominated by a few large players. That has led to higher prices and no significant improvements in patient care. Rising costs don’t just lead to alarmingly high medical bills—they also make all of us worse off by increasing premiums, the bulk of which are paid by the nation’s employers. Over the past two decades, there have been more than 1,000 mergers among the country’s approximately 5,000 hospitals, according to a forthcoming paper in American Economic Review: Insights. During that period, the Federal Trade Commission took action against only 13 transactions, even though more than 200 of the deals would have met the FTC’s bar for lessening competition. But tougher scrutiny on mergers between hospitals in the same geographic area has done nothing to slow down another approach to expansion: Hospitals buying up doctor’s practices. And they aren’t the only ones doing this. Insurers and private-equity firms all have been competing to acquire medical practices, with three out of every four doctors now working for either a hospital or a corporate owner. But sprawling health systems are by far the most dominant players, employing more than half of the country’s doctors. Source WSJ

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