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Mosaic Asset Partners - The Fed And The Economy Are Back In The Spotlight

May 03, 2024

It might be hard to feel this way, but things were actually a bit better this week highlighted by Apple’s better than expected earnings release and a Federal Reserve Committee “standing down” to some degree. Coming into the week, “about 78% of companies reporting first-quarter earnings are beating estimates, and they are beating those estimates by an unusually wide margin: 9.5%, well above the long-term average of 4.2% and average of 7% for the prior four quarters” according to Bob Pissani from CNBC. But, as has been the case recently, there were a few bumps along the way just to keep things in check. More on that in a minute, but for now let’s dig into the actions by the Fed at the conclusion of their two-day meeting this week.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the Fed’s statement said, reiterating the same language used at the conclusion of their January and March meetings. Again, they are holding the line on not committing to any moves right now. What does the mean you might ask? For context, the Federal funds rate has been locked between 5.25% - 5.50% since July 2023, which was the last time the Fed made a rate hike. Since then, we have been in a proverbial “holding” pattern as the next moves, higher or lower, have yet to be determined. But, in Chairman Powell’s post meeting comments to reporters he stated that the Fed’s next move was “unlikely” to be a rate hike. This turned the markets higher and showed the first signs of a potential pivot at some point later this year. This is a welcome sign but far from the true direction most are looking and hoping for.

While the consumer has been holding up for the most part, some visible cracks appeared with the earnings releases from McDonalds and Starbucks, which both reported disappointing sales and earnings. While we have gotten the sense that there has been some subtle shifting taking place, it appears that inflation fatigue may indeed be setting in on some of the longtime winners. As we have all experienced in the last few years, we are being more selective with our discretionary spending dollars, with price and value coming into greater focus. Spending is still taking place, but at a more measured rate it seems.

On the technology front, Apple surprised many with a robust report and an unprecedented corporate buyback of $110 billion with a big B announced. The largest in history. Even as they continue to lose market share, the cash flow generation is amazing. CEO Tim Cook specifically mentioned AI and the “big plans” Apple has on that front which will get more press at the company’s iPad centric event next week and at a developer conference in June. It remains to be seen if Apple can maintain momentum in a slowing sales environment, but it’s clear the company has a plan for moving forward.  

To cap the week off, this morning the April jobs report showed more weakness across the board with a slight uptick in unemployment. Nonfarm payrolls increased by 175,000 on the month, below the 240,000 estimate from the Dow Jones consensus. The unemployment rate ticked higher to 3.9% against expectations it would hold steady at 3.8%. Average hourly earnings rose 0.2% from the previous month and 3.9% from a year ago, both below consensus estimates and an encouraging sign for inflation. Essentially this all means that the U.S. economy added fewer jobs than expected, somewhat reversing the longer-term trend of robust growth. We have seen job losses across many sectors, especially in the technology arena, so this April report follows along with other things we have been reading and hearing about over the last few months. So, while the headlines might be read as negative (and they are to some degree), these types of economic data points will help drive the Fed’s decisions on longer-term interest rates. This Friday jobs report seems to confirm what we heard earlier from Chairman Powell that the next move is indeed likely lower, not higher. In that context, this is welcome news and our markets responded accordingly.

A lot of questions have come to us asking about the impact the impending Presidential Election will have on our markets. We will have much more detail on that in the coming weeks, but the simple answer is “likely not much.” The Federal Reserve, interest rates, inflation, economic growth, and corporate earnings along with BIG policy changes out of Washington are the keys that will drive the balance of 2024. We know that whoever our next President is, they are likely to face a wide divide among the various branches of government. Big policy changes in that scenario are unlikely to be enacted any time soon. While it’s hard to not think about the impacts of the election process, our focus remains on the underlying health of our economy and our wallets.

Have a nice weekend.

https://www.cnbc.com/2024/04/29/corporate-earnings-solid-so-far-despite-threats-from-a-slowing-economy-and-sticky-inflation.html

https://www.cnbc.com/2024/05/01/fed-rate-decision-may-2024-.html

https://www.cnbc.com/2024/05/01/starbucks-mcdonalds-yum-earnings-show-consumers-pulling-back.html

https://www.cnbc.com/2024/05/03/jobs-report-april-2024-us-job-growth-totaled-175000-in-april.html

https://www.cnbc.com/2024/05/02/apple-aapl-earnings-report-q2-2024.html

Christopher E. Wasson, CFP®

President

Mosaic Asset Partners, LLC

1122 Kenilworth Drive, Suite 310

Towson, MD  21204

410.821.0089         fax 410.821.5993

MosaicAssetPartners.com  

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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.