Nicolet Wealth Management Monthly Newsletter 6.4.24
Shelter Costs Finally Subsiding
Prices started showing signs of cooling in May, as the yearly change in inflation advanced at a rate of 3.3% from the prior month of 3.4%. The catalyst for slowing prices was a result of slowing services inflation on transportation services declining 0.5% (particularly car-insurance premiums and airfares). In addition to falling transportation services costs, the contribution of shelter costs to overall CPI has continued to narrow, and May was no exception. Shelter costs remain one of the largest contributors to inflation and has steadily declined after peaking in April 2023. Real-time indicators of shelter inflation continue to point to steady easing in prices. For example, the Zillow rent index is advancing 3.4% on a year-over-year basis, while an indicator of rent in CPI is rising 5.8%.
Federal Reserve Waiting on Inflation
The Federal Reserve kept its target policy rate unchanged at a range of 5.25% to 5.50%, signaling only one cut expected before the end of the year and four reductions totaling 1% in 2025, up from three in its previous estimate. The Federal Reserve noted in its statement that there has been modest further progress toward the committee’s 2% inflation objective, which differs from the last statement of noting a lack of progress. However, during the press conference, Fed chair Jay Powell noted that “inflation has eased… but is still too high. We’ll need to see more good data to bolster our confidence that inflation is moving toward 2%.” The trajectory of the Fed’s target policy will be dependent on stable economic activity coupled with inflation returning to its objective.
FED FUNDS RATE EXPECTATION: MARKET & FOMC
Another Cruel Summer for Gas Prices?
Gasoline prices at the start of this summer remain below the peaks of the last two summers, with the national gasoline average price just below $3.5/gallon. Prices have remained relatively low despite global conflicts and increasing demand. The 4-week moving average of gasoline demand has increased sharply from April, reaching comparable levels to 2022 and 2023 ahead of the busiest season for driving. Unlike previous years, the market can absorb increases in gasoline demand due to elevated levels of inventory. Gasoline inventory is currently at the highest level since 2021.
1 is the Loneliest Number
U.S. stocks reverted to a divergence trading pattern like the one from 2023: Large companies, driven by a concentrated number of stocks, outperformed medium and small companies by a wide margin. Large companies returned about +3.6%, while medium and small companies returned -0.8% and -1.1%, respectively. NVIDIA once again led outperformance, after becoming the largest company in the world and surpassing a $3.3 trillion market capitalization at one point in June. Investors continue to reward stocks with the best growth and margin prospects, namely in technology, while shying away from stocks with exposure to segments in the more cyclical and interest rate dependent groups.
Riskiest Bonds Perform Best
Interest rates took a step lower as the 10-year Treasury yield declined to just below 4.4%, by nearly 0.1%. At one point, the 10-year Treasury yield dropped to a low of 4.2%, as the Federal Reserve positioned the market for its target policy rate cuts later this year by noting progress in inflation. As a result, bonds with the most interest rate sensitivity performed best for most of the month until rates spiked higher. This shift in trading flipped the script on bond performance (high yield bonds returned +0.94% and investment grade bonds rose +0.64% for the entire month), as investors continued to accept investments with risk.
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