CFS Market Insights: June 2024

Hello and welcome to CFS Market Insights. I'm Jonathan Armitage, the chief investment officer at CFS. I recently had the opportunity to visit the US and see for myself the state of the some of the key sectors and companies. While the US stock market has hit new highs in recent months, what really struck me was the pressure that's emerging on low-income consumers and the increasing gap between the haves and the have nots.

Income growth for those lower paid workers has moderated, and discretionary spending for the bottom 60% in the US is being squeezed, with inflation having a real impact. This trend is most apparent when you look at food prices and grocery store profits over the last 18 months. In many parts of the US, grocery store margins are now higher than they were before COVID, and it's increasingly difficult to conclude that the US consumer overall is doing well.

We also see this through auto loans. Government payments during COVID inflated credit scores and allowed people to access money in ways they weren't able to do beforehand. And some Americans on low incomes are now really struggling with those repayments. Oversimplified consumer numbers giving a much more glowing picture than the reality may not sound like a big problem, but in an election year it certainly is. And I think that's one of the reasons why President Joe Biden is narrowly behind in the polls, because those people on low incomes are really feeling the pinch now.

One of the other takeaways from travelling around the US is that ESG and energy transition commentary has been a lot more muted. Former President Trump's advisors have suggested that he would seek to quite radically overhaul US climate and energy policy during a potential second term. This means that the Inflation Reduction Act, which is a centerpiece of Biden's economic strategy with tax breaks and subsidies for clean energies, would very much be likely in the crosshairs of a second Trump term.

What is interesting, however, is that the so-called red states which traditionally vote Republican have actually been major beneficiaries of the IRA because of federal expenditure and also the job creation that goes with that. On a more positive note, US Treasury officials are understood to be tightening up the rules and regulations and protocols underpinning the reforms which will actually make change in the future more difficult to come by.

Inflation data is continuing to be volatile and is of concern to central banks and policymakers. It may be that the market simply has to get used to the fact that the resting heartbeat of inflation is higher than we've become used to, and certainly over the last 5 to 6 years. The timing of Federal Reserve meetings and the US election in November means that there are only two rate cuts possible in July and September this year. At this stage, given the data we're seeing, it appears very unlikely that you'll see two cuts between now and December.

We've spoken previously about the volatility of inflation data and much of what we’ve covered today backs up this trend of persistent movements of up and down of inflation data. Corporate earnings are a bright spot in the US over May, but mixed messaging from policymakers is likely to keep markets slightly unpredictable in the short term.

At CFS we’re prepared for times like this and we’re continuing to position our portfolios to deal with inflation volatility as well as other issues that may turn up and provide volatility in the short term. Thanks for watching CFS Market Insights. See you next time.