Five for Friday - July 26, 2024

Bull Markets, Rate Cuts, Shipping Woes, AI, and the Olympics 

1. Bullish

Amid all the noise, political and otherwise, the important thing for investors to be aware of is that we are still in a bull market. By length and magnitude, the S&P 500 is somewhere around halfway through the average historical bull run (see right). Small-cap stocks, which are typically more economically sensitive, are up ~10% in July, and per Strategas, the percent of small-caps above their 20-day moving average—a barometer of momentum—has surged to one of the best readings in history. Sector leadership is risk-on (Financials and Real Estate outperforming), and the S&P 500 Equal Weight hit a new all-time high last week. Does the market need a breather? Possibly. Would it be surprising if recent winners consolidated gains in the next few months? Not at all. Do selloffs happen even in the grandest bull markets? You bet. But let’s not overcomplicate things—bull markets are good times to be invested, full stop.

2. Fed

A common question of late is whether the Fed would actually cut interest rates so close to the presidential election. If lower rates help stimulate the economy, a cut could be seen as more political than the historically apolitical Fed might want to appear—especially given the importance to the incumbent party of avoiding an election-year recession. Our partners at Strategas took a look at the issue this week, noting that the Fed actually has a long history of adjusting monetary policy in election years (both tighter and looser, in both Democratic and Republican regimes). “In fact, the Fed has either loosened or tightened monetary policy during every election year since 1984.” The Fed will follow the data over the politics, and with the market pricing 100% odds of a September interest rate cut, it seems investors agree.

3. Shipping

Shipping costs are again on the rise. Per the Wall Street Journal, the short-term contract rate to ship a container from Asia to the U.S. West Coast is over four times higher than it was at this time last year, while “the cost of moving a 40ft container between Asia and northern Europe at short notice has more than doubled since April” (FT). The pressures are in large part a result of the Houthi Red Sea blockade, where attacks on ships have intensified in recent weeks. But there is also the potential of a pull-forward effect—companies importing more goods today in an attempt to avoid potential tariffs down the road, driving up demand (and cost) of shipping. While the immediate impact on consumer prices is unclear (though shipping costs were a factor in the 2022 inflation spike), what does seem clear is that geopolitical headaches—be it trade war or outright conflict—will keep pressure on prices and interest rates in the coming years.

4. Weather

One big promise of artificial intelligence (AI) is improving business productivity and ultimately fueling higher profitability. The full AI use case might not be immediately obvious, but the promise is there. Take the recent breakthrough in weather forecasting made by a Google-led research group. The model, which combines AI with traditional methods, “can dramatically improve the accuracy and speed of atmospheric climate simulations” and at a fraction of the cost. Consider the huge implications of more accurate weather forecasting: more efficient agricultural operations, better insurance pricing, etc. (to say nothing of the ramifications for human life). The long-term economic benefit here is likely measured in trillions of dollars (even our most popular movies are exploring this space!) This is just one of the ways that large language models and AI could both improve productivity and benefit society in coming decades.

5. Olympic

Today is opening day for the 2024 Paris Summer Olympics. Over 10,000 athletes from 206 national teams will compete in 329 events. And while the Olympics may be a beacon of global unity, hosting them is typically a financial pitfall. Researchers at Oxford concluded that, “Every Olympics since 1960 has run over budget, at an average of 172% in real terms, the highest overrun on record for any type of megaproject.” Not great. But at least it is going to be beautiful to watch.

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