The big economic news this quarter is that inflation, as measured by the Consumer Price Index, finally fell below 3% to 2.9% in July. This is the first time the inflation rate has been below 3% since March 2021. Federal Reserve President Powell, recently indicated that the downward trend is sufficiently strong that the Federal Reserve will soon consider cutting short-term interest rates.
While inflation has been dropping, unemployment has steadily ticked up over the past several months. The unemployment rate rose 2 tenths of percent in July to 4.3%. That is an increase of half of a percent since March. Because we are still in a situation where there are more jobs than job seekers, experts do not see this to be a sign of an impending recession. Still, another recent jobs report revised downward the actual number of people hired in the past year which does lend support to the idea that the jobs market is indeed cooling.
If shoppers are concerned about rising unemployment they certainly are not showing it. Consumer spending which accounts for 68% of the US economy has done a remarkable job of consistently growing since the pandemic dip, even when adjusted for inflation. Retail sales were up 1% in July and both Walmart and Target recently reported better than expected earnings.
So the overall picture of the U.S. economy is that it continues to show resilience in 2024. The economy did grow 2.8% in the second quarter again powered by consumer spending, but also by businesses buying inventory to meet that spending as well as investing in new technologies.
After a strong first half of 2024, the US stock market rally showed signs of running out of steam in July. After 3 down weeks in a row, the markets then had a whipsaw week in early August in response to the July unemployment report and news that Japan was raising its interest rates. The week started down over 3% but recovered to finish nearly even. That momentum has since carried to less than 1% from its all-time high.
Despite some choppy weeks, the US stock market is up 3.6% for the quarter and over 18% for the year as measured by the Morningstar US Market index. Large cap stocks have done well up over 21% for the year per the Morningstar US Large Cap index. But the rally appears to have widened recently as small cap stocks have outperformed large caps this quarter. up over 6.5% according to the Morningstar Small Cap index. Global stocks have bested US stocks quarter to date, up 4.8% per the Morningstar Global Markets index that excludes the US. Developed market stocks have powered that performance up over 6% this quarter and up 11.2% for year while emerging market stocks continue to lag.
The US bond market has rallied in recent weeks in response to stock market volatility and the growing expectations that the Federal Reserve will soon cut in short-term interest rates. Overall, the US Bond market is up 4.3% for the quarter according to the Morningstar Core Bond Index. Corporate bonds did slightly better up 4.6% while government bonds lagged slightly but were still up almost 4%. Longer-term bonds have rallied strongly this quarter as the likelihood of interest rate grows. The Morningstar US Core Bond Index for bonds with maturities longer than 10 years is up over 7% this quarter.
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