July 2024
The FOMC met on June 11th, holding interest rates unchanged and maintaining the 2024 outlook of a 4.0% unemployment rate while expecting inflation to decline to 2.6% at year-end 2024 and to be 2.3% at year-end 2025. The U.S. market has continued to support a delaying Fed, as the economy and profits continue to grow, while accepting geopolitical issues (Gaza, Ukraine, foreign election shifts) and the uncertainty around the pending U.S. election. Meanwhile, the Bank of Canada lowered interest rates by 0.25% to 4.75% for the first time since March 2020. They were joined by Sweden’s Riksbank, the Swiss National Bank, and the ECB. In July we updated the FGAM U.S. twelve-month forward outlook to reflect our view for Growth (U.S. Real GDP growth greater than 2.5%) over the next twelve- month period, in response to the strong U.S. annualized 2.8% growth in Q2, up from 1.4% in Q1 2024.
China’s annual inflation rate edged down to 0.2% in June,1 while China’s surveyed unemployment rate stood at 5%.2 China’s trade surplus surged to USD 99.05 billion in June, the largest trade surplus since July 2022, as exports grew 8.6% from a year earlier, the fastest pace in 15 months, while imports dropped by 2.3%.3 The annual inflation rate in the Euro Area was confirmed at 2.5% in June 2024. Among the bloc’s largest economies, inflation slowed in Germany (2.5% vs 2.8%), France (2.5% vs 2.6%) and Spain (3.6% vs 3.8%) but edged higher in Italy (0.9% vs 0.8%).4 The unemployment rate in the Euro Area stood at an all-time low of 6.4% in May.5
The U.S. economy expanded an annualized 2.8% in Q2, up from 1.4% in Q1. Net trade dragged growth for a 2nd consecutive quarter as imports rose faster (6.9% vs 6.1%) than exports (2% vs 1.6%).6 The trade deficit in the U.S. widened to $75.1 billion in May 2024, the largest since October 2022 from a revised $74.5 billion in April. Exports also fell for automotive vehicles, parts, and engines, in particular trucks, buses, and special purpose vehicles. The trade gap widened with Mexico ($14.8 billion vs $13.7 billion in April) and China ($24 billion vs $20.1 billion), while the gap with Europe narrowed to $22.7 billion from $25.9 billion.7 The annual inflation rate in the U.S. fell for a third straight month to 3% in June.8 The unemployment rate in the United States rose to 4.1% in June, the highest since November 2021.9 The Canadian economy expanded by 0.4% in the first quarter of 2024, accelerating from a downwardly revised flat reading in the previous period. Imports of goods and services saw a modest increase of 0.4%, while exports experienced a slightly higher rise of 0.5%.10 The annual inflation rate in Canada eased to 2.7% in June,11 while the unemployment rate in Canada rose to 6.4% in June from 6.2% in the earlier month.12
Powered by mega-cap outperformance, U.S. large-cap equities surged upward, with the S&P 500 up 4.3% in Q2 2024. Mid and small caps lagged, the with the S&P Mid Caps and S&P Small Caps down 3.5% and 3.1% respectively in Q2. Canadian equities finished the quarter on the downside as the S&P/TSX Composite declined 0.5% in Q2. The S&P Europe 350 took a breather in June, slipping 1.0% to trim its year-to-date gain to 9.8%. Three of 16 countries contributed positively to the pan-European equity returns in June, with the Netherlands the biggest positive contributor with +0.3%, while France subtracted 1.1%. Pan Asia equities advanced in June, with the S&P Pan Asia BMI rising 1.9% to post a 6.8% return for the first half of 2024.
In July we updated the asset allocation from June, reducing the 3–7-year treasury exposure across the board by 10% and putting that allocation in U.S. small caps. This reflects our expectation of a broader recovery across all market capitalizations as the U.S. economy strengthens. We continue to maintain short duration U.S. fixed income exposure as we are in early growth with interest rates in the U.S. holding at current levels. Gold is held across all models as a long-term strategic asset as it will continue to benefit our portfolio models at this transition point from Stagnation to Growth.
Fiscal policy and electoral cycles will continue to dominate our outlook. Our twelve- month forward outlook will continue to monitor the size and scale of the U.S. budget deficit, coupled with the substantial Treasury debt issuance required to address it. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame, President and CIO
Drew Millard, Portfolio Manager
1 Trading Economics. China Inflation. July 10, 2024.
2 Trading Economics. China Unemployment. July 15, 2024.
3 Trading Economics. China Trade. July 12, 2024.
4 Trading Economics. EU Inflation. July 17, 2024.
5 Trading Economics. EU Unemployment. July 2, 2024.
6 Trading Economics. U.S. GDP. July 25, 2024.
7 Trading Economics. U.S. Trade. July 3, 2024.
8 Trading Economics, U.S. Inflation, July 11, 2024
9 Trading Economics. U.S. Unemployment. July 5, 2024.
10 Trading Economics. Canada GDP. May 30, 2024.
11 Trading Economics. Canada Inflation. July 16, 2024.
12 Trading Economics. Canada Unemployment. July 1, 2024.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. June 30, 2024. Index performance is based on total returns and expressed in the local currency of the index.
