Model Portfolios | August Update

S&P 500 5522.30 10-Year UST Yield 4.05% :: July 31, 2024

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.”

-Donald Rumsfeld

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FEDERAL RESERVE UPDATE

The Federal Open Market Committee (FOMC) voted unanimously on July 31st to keep the federal funds target range at 5.25% to 5.5%. The Fed will also continue to reduce its holdings of U.S. Treasury securities and mortgage-backed securities (MBS). In the monetary policy statement, Fed officials noted “that the risks to achieving its employment and inflation goals continue to move into better balance.”

In the post-meeting press conference, Fed Chair Powell delivered prepared remarks that made it clear that the Fed is ready to cut rates at the upcoming September FOMC meeting if the incoming inflation data cooperates or if the labor market continues to weaken.

“We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. The second-quarter’s inflation readings have added to our confidence, and more good data would further strengthen that confidence. We will continue to make our decisions meeting by meeting. We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

-Fed Chair Powell

The CME FedWatch Tool is currently pricing in a 100% probability of a rate cut at the September 17th and 18th FOMC meeting.

Over the past year, the Fed has reduced its balance sheet by just over $1 trillion:

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GROSS DOMESTIC PRODUCT

Real gross domestic product (GDP) increased at a 2.8% annualized rate during the second quarter of 2024, following a 1.4% pace of growth in the first quarter. During the first half of 2024, real GDP growth averaged 2.1%, close to our long-term trend growth rate estimate of 2%.

Personal consumption expenditures (PCEs) are the most significant component within GDP, representing nearly 70% of the overall GDP figure. During the second quarter, PCEs contributed 1.6% to the overall 2.8% figure, an improvement from their 1.0% contribution in the first quarter. Gross private investment contributed 1.5%. Net exports subtracted -0.7% and government consumption expenditures added 0.5%. View a more detailed real GDP contribution breakdown in Table 2 of the report.

Looking ahead to the third quarter, the Atlanta Fed GDPNow model has an initial forecast of 2.8%. The New York Fed Nowcast estimates third quarter growth at 2.7%.

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HOUSING MARKET

The NAHB/Wells Fargo Housing Market Index (HMI) measures conditions in the single-family housing market. The index fell one point to 42 in July, the lowest reading since December 2023. HMI Index readings above 50 are indicative of favorable single-family home builder sentiment. The July report noted that 31% of builders are cutting prices to boost home sales, up from 25% in May. The current sales conditions index fell one point to 47, the measure of sales expectations over the next six months increased one point to 48, and the prospective buyer traffic index fell one point to 27. The NAHB Chief Economist commented that “while home inventory is increasing, total market inventory remains lean at a 4.4 months’ supply, indicating a long-run need for more home construction”. Regionally, the Northeast was the strongest, despite declining to 56, and the West was the weakest, falling four points to 37. The Midwest and South were slightly weaker at 43 and 44.

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INFLATION UPDATE

The Fed’s preferred inflation measure is the personal consumption expenditure (PCE) price index. The most recent PCE report showed the index was up 0.1% in June. The core PCE, which excludes the food and energy components, rose 0.2% in June.

As shown in the chart below, the headline and core PCE rates have been decelerating for the last two years. The most recent three-month annualized headline PCE inflation rate is 1.5%, and the three-month annualized core-PCE rate is 2.3%. The decline in these shorter-term inflation measures should give most FOMC members confidence that it is time to lower the fed funds rate as soon as the September FOMC meeting.

Headline PCE:

+0.1% seasonally adjusted in June, following 0.0% in May

+2.5% year-over-year

+1.5% latest 3 months annualized

+3.0% latest 6 months annualized

Core PCE: (excludes food and energy)

+0.2% seasonally adjusted in June, following +0.1% in May

+2.6% year-over-year

+2.3% latest 3 months annualized

+3.4% latest 6 months annualized

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MONEY SUPPLY

Below is the monthly update of the Marketimer and Brinker Fixed Income Advisor Model Portfolios through July 31, 2024.