Here are the economic and market highlights for the week:
- The June CPI report showed prices continue to ease for inflationary-weary consumers. CPI fell -0.10% in June, weaker than the 0.10% they were expected to gain. A drop in gas prices and in new and used car prices drove the first monthly decline we’ve seen since May 2020. YOY, prices were higher by 3.00%, a slower pace than May’s 3.30% rate. Core CPI, which excludes volatile food and energy costs, rose 0.10% in June as well, which was a significant softening from the 0.20% logged in May. Still, core CPI was up 3.30% from a year ago. This too was slower than the 3.40% recorded in May. The softening in core inflation was helped predominantly by a slowdown in the cost of shelter which rose at a 5.20% clip from a year ago. Headline inflation continues to move in the right direction, although it is still well above the Fed’s 2% target. On the wholesale side, the PPI index rose 0.20% in June, higher than the 0.10% estimate, but prices overall were only up 2.60% from the prior year. Markets largely dismissed the wholesale month-to-month increase since it was driven primarily by an increase in healthcare services which were believed to be transitory. Overall, the inflation report was about as good as markets could have hoped for.
- Nonfarm payrolls slowed to 206K new hires in June, down from 218K in May, while the unemployment rate ticked higher from 4.0% to 4.1%. This marks the highest unemployment rate since November 2021, but in a positive light, the increase was driven by an additional 277K workers entering the labor force rather than companies laying off. The report also showed downward revisions to April and May hiring numbers, pushing job growth down by 111K. That brought the 3-month average of payroll gains down to 177K, the slowest pace since January of 2021. The much watched average hourly earnings figure rose 0.30% for the month, bringing the year over year rate to 3.90%. After having been resilient throughout 2023, the labor market appears to be getting back to equilibrium now that we are midway into 2024.
- Both the services and manufacturing data fell into contraction in June. The ISM Manufacturing Index slipped to 48.5, missing estimates of 49.1. Numbers below 50 signal contraction while those above signal expansion. June’s report marked the third month of contraction for manufacturing, suggesting businesses and consumers are waiting for interest rates to fall before increasing investment and large ticket purchases. Surprisingly on the services side, the ISM services index registered 48.8, well below estimates of 52.7. Business activity, new orders, and inventories all moved lower during the month. This sudden drop off in activity is notable given the consumer has been incredibly resistant to high rates to this point, and their preference to spend on services over goods. This conservative shift appears to be more than a seasonal or data blip given that the observation is mirrored in comments made this week by airline and consumer staples executives.
Stocks Hit Record Highs on Soft Economic Data
The S&P 500 and Dow Jones Industrial Average hit new highs this week. Ironically, it was the release of a string of weaker-than-expected economic reports that served as the catalyst for the market to surge higher. It is no secret that this year’s rally has been fueled by anticipated rates cuts, but the Fed has consistently qualified their willingness to do so only once having “confirmation” that inflation is indeed under control. Economic weakness is inflation’s Kryptonite, and to the degree the data prior to this week may have had the Fed on the fence over a September rate cut, this week’s releases could only have been authored by Lex Luther himself. June’s CPI report was the first month-to-month decline in four years – that’s right – actual deflation. Services and manufacturing are in contraction. Hiring is at the low end of acceptable. Topping it off, Fed Chair Jerome Powell sounded optimistic about the prospect of a rate cut during his testimony before Congress. The CME FedWatch Tool now pegs the odds for a September interest-rate cut at 88% as we closed out the week. Of course, sharply weaker data is only a good thing in the exact context that we have right now, having come off a three year consumerist debt fueled binge, and knowing that the near term weakness will give way to sane, stable growth before things really get too concerning. The market will have to contend with the second half of that statement at some future date, but as far as investors’ needing weakness confirmed, they got that and their September rate cut this week.
Next week, we will be in the thick of earnings season. It’s expected to be a strong one with reported earnings expected to rise 9.60% YOY. About half of the earnings growth is expected to come from true operational performance and the other half from “as reported” alchemy. It is hard to reconcile the weakening macro picture, with analyst’s estimates on a bottom up basis, but this is the set up and expectation. Sentiment is very positive with seemingly more positive things to come – if not on a fundamental basis, then for no other reason than pure momentum. To that point, we’ll share a statistic we found from Edward Jones analyst, Brock Weimer. Since 1970, there have been 13 instances where the S&P 500 has returned greater than 15% in the first half of the year (as we have this year). In all but 3 instances, the remainder of the year went on to be positive as well. With the Fed set to cut 2 or 3 times between now and the end of the year that statistic is likely to be even further handicapped in investors’ favor.
The Week Ahead
Traders will pour over corporate earnings results as the Q2 earnings season continues. Retail sales and housing starts will also be on tap.
Back to School for Baby Boomers
The Baby Boomer generation refers to those born between 1946 and 1964 and who are currently in their 60s and 70s. Appropriately named, the “baby boom” encompasses the period following World War II during which birth rates in the United States (and other countries) surged significantly. This demographic spike was driven by a period of economic prosperity following the war, increased societal optimism, and advancements in healthcare that lowered infant mortality rates. In terms of relative population size, the Baby Boomer generation is quite large. In the United States alone, there are approximately 73 million Baby Boomers. The generation prior, the Silent Generation (born between 1928-1945), is estimated to be 23 million, and the generation after, Generation X (born between 1965-1980) includes approximately 65 million. Baby Boomers are currently reaching retirement age at an incredible pace. In 2024, more than 4 million baby boomers will turn 65 – the largest number of people in history to reach this milestone in a single year.
What Baby Boomers Want
Compared to earlier generations, Baby Boomers tend to be more financially secure, well-educated, and eager for continued engagement and community involvement. As they enter retirement, they are seeking active, intellectually stimulating lifestyles. To accommodate the retirement wave, a new trend is emerging: university-based retirement communities (UBRCs). These communities provide a dynamic and innovative alternative to other types of senior living. Residents not only benefit from access to campus amenities—including libraries, fitness centers, and cultural and sporting events—but also enjoy the intellectual stimulation of participating in classes alongside traditional students.
This doesn’t mean seniors are living in college dorms. UBRCs include individual housing units with some having apartment-style living or condominiums and others having small neighborhoods with townhomes, duplexes, or single-family homes near or on campus. Mirabella at Arizona State University is a luxury high-rise complex at the edge of campus with around 300 apartments that were designed and built specifically for seniors. It is marketed as “an intergenerational community fueled by lifelong learning and collegiate energy.” One of Mirabella’s four on-site restaurants was internationally recognized as a 2024 winner of a prestigious Wine Spectator award.
An estimated 85 colleges in America are affiliated with some form of senior living, including Stanford, Penn State, Notre Dame, University of Michigan, and the University of Florida, to name a few. The UBRCs have helped colleges address the challenge of filling the vacancies left by declining student enrollments. College enrollment peaked in 2010 at 21 million and, since then, has declined 9.6%. As the UBRC trend gains momentum, it offers seniors an alternative, reimagined retirement immersed in campus life and community activities that may offer a sense of purpose and fulfillment during retirement years.