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Inflation: Cooling Down, But Where's the Growth?

Inflation: Cooling Down, But Where's the Growth?

May 16, 2024

Let’s talk shop! Remember way back in February when I kept mentioning a potential market dip? Well, guess what? It finally happened! Don't worry, though, it wasn't a full-on rollercoaster plunge, more like a quick bunny hop on that funhouse ride we all loved (or maybe hated?) as kids.

Let's break it down. April saw the U.S. equity market take a little tumble, with the S&P 500 dropping around 5%. So far in May, things are looking a little calmer, but it's still a bit of a bumpy ride. Treasury yields, which move in the opposite direction of bond prices, have actually risen a touch. This isn't necessarily bad news, but it can make some bonds in your portfolio less attractive. Since we experienced that little blip in stock prices in April, any downturns we see during the summer may be minimal. I’ll be expecting a little more volatility in the market come August to October.

Now, I know inflation has been a thorn in everyone's side lately. Grocery bills feel heavier, and that dream vacation seems a little further out of reach. But here's the good news: even though inflation ticked up slightly recently, I still believe it will continue to cool down as the year progresses. Think of it like a hot cup of coffee – eventually, it reaches room temperature, right?

Here's why I'm optimistic: car prices, insurance costs, and even housing statistical anomalies in the inflation reports are all expected to settle down. It won't happen overnight, but progress is progress, folks!

Speaking of progress, let's talk about some good news – corporate earnings! The first quarter results for the S&P 500 companies have been fantastic. As of writing this, a whopping 92% of companies have reported their earnings, and guess what? A whopping 81% of them beat analysts’ expectations! Not only did they beat them, but they beat them by a solid 8%. That's some serious muscle-flexing by American businesses.

This stellar performance shouldn’t be just a one-time thing. Analysts are actually raising their earnings forecasts for the rest of the year and even next year. It seems companies are finding ways to make more money even without a huge increase in sales. How are they doing this? By being super cost-conscious! They're tightening their belts and finding ways to operate more efficiently. Now that's what I call smart business!

Remember the toilet paper shortage of 2020? Yeah, that wasn't exactly our finest hour. The pandemic exposed some serious weaknesses in global supply chains. That's where the "reshoring" trend comes in. Basically, U.S. companies are looking to bring manufacturing back home or at least diversify their sourcing to mitigate risk. This is great news for American industrial companies who can step up and fill the gap. This is where the recently passed Inflation Reduction Act and CHIPS Act come into play. These bills are designed to boost domestic manufacturing and infrastructure, which is great news for companies involved in construction and maintenance of these facilities. Think heavy machinery, building materials, and engineering firms – they could all be poised to benefit.

Plus, don't forget about AI. The rise of this technology is driving a massive need for data centers, which are basically warehouses for all your digital information. Building and maintaining these data centers requires a lot of construction and maintenance – think industrial companies with expertise in advanced manufacturing.

Remember, this is just a snapshot of the market, not a crystal ball. But by understanding these trends, you can understand the decisions made about your portfolio. Here's the bottom line: don't let market blips scare you. Stay focused on the long term and keep your eye on those sectors that may be poised for future success. As always, feel free to reach out if you have any questions! Until next time, happy investing!

Best regards,

 

Ricardo J. Ferreira

Founding Partner, Portfolio Manager

 

 

 

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. Any securities mentioned here are for informational purposes only and are not recommendations to buy or sell any security.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.