Macro Assets At a Glance 6/11/24
SPY (Large Cap Equities)
The S&P 500 continues to demonstrate strong performance, reaching new highs largely driven by gains in the technology sector. As of early June 2024, the S&P 500's year-to-date return stands at 12.69%, with the total return, including dividends, at 13.41% (SlickCharts). May 2024 saw a significant monthly return of 4.80%, rebounding from a -4.16% drop in April (YCharts). However, with the Consumer Price Index (CPI) print expected on June 12th, there's anticipation of a hotter-than-expected report, which could increase volatility in equities. Given these dynamics, investors should brace for potential fluctuations in the large-cap index.
Risk Assessment: Medium
TLT (Bonds)
Long-term bonds are facing potential liquidity issues as CPI is projected to rise throughout the year. The US Treasury's new buyback program aims to mitigate this by purchasing longer-dated treasuries and selling shorter-term ones. This intervention could stabilize or even lower yields on the back end of the yield curve, depending on the scale of the repurchases. Historically, during periods of economic slowdown and rising inflation, we would expect an increase in the back end of the yield curve and a reduction in the inversion. However, the Treasury's actions might prolong the inversion until the buyback program ceases or inflation decelerates, likely by Q2 2025.
Risk Assessment: Medium
GLD (CPI Inflation/Real Interest Rates)
Gold remains a strong asset amid rising inflation, although increased selling pressure on the front end of the yield curve by the Treasury presents challenges. Despite these headwinds, gold continues to be a resilient asset class, particularly as the economy slows and inflation remains elevated. This positions gold, along with the US dollar, as a crucial holding during this period.
Risk Assessment: Low
UUP (US Dollar Relative Value)
In the face of rising inflation, the US dollar remains a robust asset due to the Federal Reserve's tightening monetary policy. This tightening strengthens the dollar relative to other currencies, making it a favorable investment despite the inflationary environment. The Federal Reserve's actions are critical in maintaining the dollar's strength, reflecting its relative value against a basket of other currencies.
Risk Assessment: Low
IWM (Small Cap Equities)
Small-cap equities carry a higher risk compared to their large-cap counterparts. The Russell 2000 index, representing small caps, has struggled, highlighting the vulnerabilities within this segment. Any positive trends in IWM are likely to be short-lived as we move into a slowing economy with re-accelerating inflation, potentially leading to increased volatility, especially in the late third quarter of 2024.
Risk Assessment: Medium
EEM (Emerging Markets Equities/US Dollar Inverse)
Emerging markets are expected to face significant headwinds due to the strengthening US dollar. As the dollar appreciates, capital inflows are likely to favor US assets over those in emerging markets, creating adverse conditions for asset prices in these regions. This dynamic increases the risk for emerging market equities, particularly as capital moves out of other currencies and into the US dollar.
Risk Assessment: High
Summary
Prepare for a potentially volatile period following tomorrow's CPI print, which is expected to be higher than anticipated. Despite the S&P 500 nearing all-time highs, underlying growth remains weak, with significant contributions from Federal Reserve liquidity. Government spending has predominantly favored sectors like semiconductors and renewables, artificially inflating asset values. As the Federal Reserve continues its tightening measures and government spending slows, US inflation is projected to rise again in the latter half of the year. This environment, reminiscent of early 2022, suggests a possible market correction of 10-15%. Our strategy will focus on holding US dollars and gold, similar to our approach in early 2022, to navigate through the expected market turbulence and protect against equity and bond market declines.
Disclaimer
The information provided in this article is for informational purposes only and should not be considered as financial advice. Market conditions are subject to rapid change, and past performance is not indicative of future results. The projections and risk assessments are based on current data and market analysis but carry inherent uncertainties. Investors should conduct their own research and consult with a licensed financial advisor before making any investment decisions. The author and publisher are not liable for any losses or damages resulting from the use of this information.
