Gill Capital Partners June 2024 Market Update

June has brought a change from the cool, wet weather to record high temps and plenty of pollen to fire up those pesky allergies. Stock markets are also putting in record highs this month on the back of continued strong corporate earnings, encouraging economic data, and cooling inflation. This, combined with the boom in Artificial Intelligence (AI), has investors feeling much more optimistic. We will get into all of that, including recent comments from the Federal Reserve, but first, a few interesting data points and comments on AI, Nvidia, and Apple.

Nvidia recently reported fiscal first-quarter earnings that beat what were already lofty expectations for both sales and earnings, sending the stock soaring once again. In the past year, Nvidia sales have skyrocketed as companies such as Google, Microsoft, Meta and Amazon have been falling all over themselves to purchase Nvidia’s advanced graphics processing units, which are required for developing and deploying artificial intelligence applications. The company’s largest and most important business is its data center sales, which includes its AI chips as well as many other specialized technologies needed to run big AI servers. Nvidia said its data center sales increased 427% from a year ago. Total company sales were up 18% from the previous quarter and 262% from a year ago. Earnings were also up 21% from the previous quarter and up 461% from a year ago. Jensen Huang, founder and CEO of Nvidia said, “The next industrial revolution has begun — companies and countries are partnering with Nvidia to shift the trillion-dollar traditional data centers to accelerated computing and build a new type of data center — AI factories — to produce a new commodity: artificial intelligence.”

Apple also had some major announcements last week regarding their plans for AI. They announced a major new partnership with OpenAI, which is the first of its kind for Apple. This partnership will allow Apple’s millions of users to access technology from OpenAI, which will be integrated into Apple’s digital assistant Siri. Apple also announced that they will be rolling out what they call “Apple Intelligence,” their own new Generative AI software. The announcements sent Apple stock to fresh all-time highs.

Our view –Like it or not, the AI boom is real. Businesses are spending billions to build out new platforms and position themselves for this new technological innovation. Many of our clients have asked us how we are investing in this theme. Our large cap equity positions are invested heavily in the major names such as Microsoft, Nvidia, Amazon, Meta, and Apple. Microsoft, Apple, and Nvidia, as an example, make up 13%, 12%, and 11%, respectively, of the growth ETFs that our clients are directly invested in, providing significant and direct access to the rapidly expanding theme. We also have active managers that are invested in these companies and others that are directly in the path of AI innovation. These ETFs have become incredibly concentrated in these names due to their market cap weighting philosophy, and have become much less diversified as a result, which is something we are discussing within our Investment Committee.

Inflation

We received the May inflation numbers last week, which showed that the Consumer Price Index (CPI), a broad measure of the cost of goods and services, increased by 3.3% year-over-year versus an expectation of 3.4%. On a monthly basis, the index held flat versus an expectation of an increase of 0.1%. Core CPI increased by 3.5% year-over-year versus an expectation of 3.5%, and on a monthly basis Core CPI rose by 0.2% versus an expectation of 0.3% for the month and 3.5% from a year ago.

Falling energy prices were the single greatest contributor to the overall moderation of price inflation in May, with gasoline prices falling 3.5% after posting increases in each of the prior three months. There has also been a broad pullback in grocery prices, with the “food at home” category posting zero or even negative price inflation for the past four months. This is largely due to falling agricultural commodity prices and price pressures easing in the labor market. Shelter prices have continued to be the one sticky inflationary component, though most economists foresee price pressures beginning to ease in the coming months’ reports due to a lag in the reporting.

Our view –The market cheered this report as a reinforcement of the disinflationary narrative, and that inflation is almost back in the bottle. There is still further to go to get inflation closer to the 2% target, but economists believe we are on the right path and this report shows an improving inflationary picture. The labor market, while still very robust, has eased just enough to relieve some of the excess pressure on many of the labor components within the overall inflationary picture. This report was positively received by markets as it showed consistent moves in the right direction and presents a hopeful outlook on inflation, as well as the prospect for an easing of the restrictive Fed interest rate policy.

The Federal Reserve & Interest Rates

The Federal Reserve met last week and held interest rates steady at the current range of 5.25% to 5.5%, but revised their outlook for rate cuts to just one in 2024. Central Bank policymakers noted that there has been “modest further progress” toward their 2% inflation objective. Federal Reserve Chairman Jerome Powell noted at his post-meeting press conference that the central bank does not yet have the confidence to cut rates, even as inflation has eased from peak levels from summer of 2022. The Committee modified their interest rate outlook by removing two rate cuts for this year but did indicate a more aggressive cutting path for 2025, with four reductions totaling a full percentage point. This is up from three following the last meeting. For the period through 2025, the committee now sees five total cuts equaling 1.25 percentage points. During his post-meeting press conference, Powell said that May’s CPI report was better than expected and that “We see today’s report as progress, but we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.”

Interest rates have been moving lower over the past month as markets have digested various economic and inflation reports and the most recent comments from the Federal Reserve. As of this writing, the benchmark 10-Year U.S. Treasury is hovering just below 4.3%, down significantly from the highs of April at just over 4.7%. Interest rates across the curve have eased in a similar manner, reflecting a growing sentiment that while we have further to go in the fight against inflation, there is light at the end of the tunnel.  

Our view – It appears, at least for now, that the Federal Reserve is gracefully navigating this inflationary cycle with the utilization of their various policy tools. The surprising economic strength that we have seen over the past few quarters has taken most economists by surprise in the face of this tightening cycle, thanks largely to strong corporate and consumer spending, a robust labor market and a nascent AI boom. While the prospect for rate cuts has been delayed over the course of this year, it is coming more into focus, and the market is gaining confidence in the Fed’s forecast. It is stunning how well the economy has held up in the face of the highest interest rates in over 20 years!

We will continue to update you as we learn more. Until then, stay cool and enjoy your summer!

As always, please let us know if you have any questions or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.