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Writer's pictureDoug MacGray
Jul 146 min read

Inflation Eases, Stocks Rotate, Marriage Endures

July 14, 2024


INFLATION RATE EASES A BIT MORE:  The Consumer Price Index for June declined 0.1%. Over the last twelve months, the rate of inflation decreased to 3.0% from 3.4% the month before. Gasoline prices decreased 3.8%. The so-called "core" CPI, that excludes food and energy, rose 0.1%, and the twelve month core CPI came in at 3.3%, down from 3.6%. In the first quarter, inflation numbers came in consistently higher than consensus economist predictions. In the second quarter, the opposite occurred. 


FED CHAIR BEGINS TO SOUND LIKE HE IS OPEN TO LOWERING RATES:  Last week, Fed Chair Jerome Powell testified before Congress. In prior testimony, late last year and earlier this year, he testified that lower inflation was laying the groundwork for lowering interest rates. When inflation persisted, his case for lowering rates weakened. This past week, he said that in addition to lower inflation rates, the cooling labor market will also provide impetus for lowering rates. Balancing the Fed's 2% inflation goal with the competing goal of preventing significant damage to the labor market "is the number one thing that just does keep me awake at night," said Powell on Wednesday. He stated that the current state of the labor market is no longer a source of strong inflationary pressure.


INVESTORS LIKED THE INFLATION DATA: Stocks ended the week on a high note after Thursday's inflation data announcement. It was a different rally, however. So far this year, stocks have been led by several large companies as investors have not seemed confident enough to invest in the broader market. This week was what they call a "rotation." Traders sold out of this year's leaders and bought stocks in 2024's laggards. As you can see below, the S&P 500 had a good week, up nearly 1%. But the Russell 2000, which measures small cap stocks in the U.S. rose 6% for the week. Big banks did not do well this week after releasing disappointing quarterly earnings reports. High interest rates are hurting them.  



LONGER-TERM PERFORMANCE:  Below are the annualized three-year and five-year numbers for these same indices.  



TWO DAYS DOES NOT A CYCLE MAKE, BUT....:  On Thursday, our Investment Director, Logan MacGray, CFA, presented a webinar to our clients. A key point he made was that U.S. large cap stocks, and in particular the largest of the large cap stocks, are leading the markets higher, but may be overpriced. Small cap stocks, which have not done well, appear to be undervalued. On top of that, historically, when interest rates have decreased, small cap stocks have done better than large cap stocks in the U.S. The overall message was that now might not be a good time to abandon your small cap stocks for the large caps, which have been doing so well. There is actually an exchange traded fund that only holds the "magnificent seven" companies. Below, you can see how that fund (MAGS - purple below) had done through Thursday of last week compared to the S&P 500 (orange) and small cap stocks, represented by the Russell 2000 index (blue).



SMALL CAP STOCKS ARE INEXPENSIVE BY HISTORIC GUIDELINES:  Below is a chart we used to show that small cap stocks have been trading below historical averages (about 17% below), while large cap stocks have been trading at about 15% above historical averages. As you can see from the chart, that last time we saw such a disparity was around the turn of the century. After the tech bubble, you can see that large and small traded closer together until the last couple of years.



LOWER INTEREST RATES HAVE HISTORICALLY HELPED SMALL CAP STOCKS MORE:  Finally, we used this graph to show that during environments where interest rates are declining, small cap stocks have done better than their large cap counterparts.



....AND THEN:  As Logan was presenting on Thursday, the markets began to react to the lower-than-expected inflation data. Earlier last week, Fed Chairman Powell provided some encouraging remarks about rate cuts. The inflation numbers that came out on Thursday created optimism that rates will go down relatively soon, and what did the markets do? On Thursday, carrying through the rest of the week, small caps outpaced the magnificent seven (as measured by the MAGS exchange traded fund, purple below) by about 8.6%! Small caps outpaced large (as represented by the S&P 500, orange below) by 5%. Two days does not a cycle make, but it was interesting to watch investors pull their money from large caps and move it to small caps the moment general optimism about interest rates hit the overall investing environment. Another lesson learned is that no cycle lasts forever. Will this one (small caps beating large caps) only last two days, or did it mark the end of the dominance of large caps and/or the magnificent seven? Tune in next week!



BROKERAGE REVIEW:  Stonecrop Wealth Advisors, LLC is a Registered Investment Advisor with the Securities and Exchange commission. We love the structure which requires us to provide our services to clients as a fiduciary. As a fiduciary, we are required to put clients interest ahead of our own (sounds a little like the Golden Rule!). One of the decisions we need to make with that standard in mind is where we will custody assets that we manage. For many years, we used TD Ameritrade. As many of you know, TD Ameritrade and Schwab merged, which meant our clients custodial relationship would have gone from TD to Schwab had we not done anything about it. After extensive review of options, we decided to proactively move our client assets to Fidelity, and we have been very happy with the decision. Recently, Brokerage-Review.com did their own review of a variety of companies to compare them. They reviewed the retail experience of investors at Schwab, Fidelity, Firstrade, Vanguard, and Northwest Mutual. When they looked at how those five compare as far as services go, Schwab and Fidelity come in one and two. Based on our experience with both, we would flip that. You can see the remaining results here. Costs are similar, and the comparison of mutual fund commissions is irrelevant because we do not charge commissions. Under the site's overall review of "Investment Services" it ranked Fidelity as the best.


JUST SO YOU KNOW:  Every year or so, I go away on a trip to the Dominican Republic, Panama, Uganda, or some other country based on my volunteer work with an organization called Edify. It is a unique, and very effective Christian ministry that helps low (very low) cost, private schools in challenged areas to survive and thrive despite their challenges, to the benefit of their communities. The owners of these schools are some of the most inspiring people I have ever met. It never fails that when I go on one of these trips, and bring it up in this email, someone responds and asks when the next one is. Right after a trip, the next one is generally not planned. But now one is. From November 6-10, I am helping lead a group that is going to visit schools in the Dominican Republic. There is a cost involved, and you have to arrange your own flights. This is a potentially life-altering (for the good) trip. So, if you have any interest, let me know, and I will get you the details. Zero pressure from me, but if there is anyone out there who wants to go, I'd rather find out now, not after I post my pictures in MacGray Matter on November 11. (Below is a picture from last November.)



ANOTHER YEAR:  I have been married to Deb for many years now, and we had another anniversary this past week. Sometimes it truly seems like yesterday that we exchanged vows in a small brick church in Beaver, Pennsylvania, and enjoyed a reception at the Beaver Country Club with a band called "The Swing Locks." God has profoundly blessed me. We went to a restaurant called Harry's about a half mile from our house, and without asking, they presented our desert with a little message.



Have a great week!


Our purpose is to honor God by helping our clients see the objective, find the path, and navigate past the obstacles to a more prosperous future.



Douglas R. MacGray, J.D., C.F.P. ®

President

Stonecrop Wealth Advisors, LLC

Direct | Cell | Fax

(610) 628 4545


"The more you know, the more you know you don't know."  Aristotle


"Though your riches increase, do not set your heart on them."  Psalm 62:10 (NIV)


SOURCES:

SMALL CAP STOCKS ARE INEXPENSIVE BY HISTORIC GUIDELINES: Factset.com

LOWER INTEREST RATES HISTORICALLY HAVE HELPED SMALL CAP STOCKS MORE: Jefferies using Federal Reserve board, Haver Analytics, Center for Research in Securities Prices and the University of Chicago Booth School of Business.

....AND THEN: YCharts.com

INFLATION RATE EASES A BIT MORE: https://www.bls.gov/news.release/cpi.nr0.htm


(c) 2024 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved


*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets.

*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States.

*Bloomberg U.S. Aggregate: This is a measure of the U.S. bond markets.


Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

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