What’s New

Following a couple of months of macroeconomic surprises, May seemed to be a quieter month. Inflation data resumed its downward trend after providing some cause for concern in April. This allowed for sovereign yields to fall, helping to push equities higher through the first half of the month. Interestingly, rates and markets both turned mid-May, with higher rates weighing on headline indices in the US.

Nevertheless, US equities ended the month higher, with the S&P 500, Dow Jones Industrial Average, and Nasdaq returning 4.96%, 2.58%, and 6.39%, respectively.

Treasury yields moved lower over the same time frame.

Taking a step back and trying to ignore some of the noise, the broader backdrop remains largely unchanged. Data continues to suggest that the US economy is slowing.

Now it is more than fair to wonder what that ultimately means—are we heading for a harder landing or simply coming off unsustainably high levels of growth?

Right now, it certainly appears to be the latter, though the former is not off of the table. Inflation is trending lower, but as we’ve seen, it may not be a smooth ride down and upside risks clearly remain. This complicates the Fed’s job and has pushed expectations for rate cuts into the back half of the year. Meanwhile, political rhetoric is starting to heat up with a promise to get much, much hotter soon, and geopolitical tensions remain elevated.

Against this backdrop of elevated risks, markets continue to look very expensive in the US. We’ve been talking about several industries being priced to perfection, and we continue to believe that this is the case. In fact, we saw several companies sell off aggressively on fairly benign earnings simply because of the expectations that were baked into the valuation. Such an environment continues to necessitate a focus on risk management.

Our Perspective

We believe that our active approach to investment management will continue to allow us to uncover investment opportunities, while largely avoiding parts of the market where we see elevated risks moving forward.

It is yet to be known if the Fed can bring inflation down from the levels we’ve seen without causing significant economic hardship, leaving the questions of whether a soft landing can happen and when the first-rate cut will be this year lingering in the air.

With the US economy showing cracks, earnings would likely be hit hard by the economic slowdown driving the Fed to cut. However, the continued resiliency of the US economy and the downward trend in inflation have increased the odds of a more benign outcome. Meanwhile, valuations are far from attractive at a broad level, and it leaves us wondering what many market participants are playing for.

We continue to closely monitor for signs of weakness and what it all can mean for the start of a rate-cutting cycle, as we prioritize risk management with a defensively positioned strategy in our core portfolios.

2024 Election: What We Think for Markets

With the election under six months away, it’s only natural to be concerned about the market implications of different outcomes. After all, the economy is slowing, inflation is threatening to remain elevated, and financial markets look fully priced. Could elections be the straw that breaks the camel’s back? Read the article for our full thoughts.

Our View

Economic Cycle		The economy is in a late cycle, though it continues to prove incredibly resilient. The Fed hiked aggressively and we saw significant pain in industries including transport and manufacturing. However, the US consumer has remained strong. We believe that the lagged effect of monetary policy may start to be felt in other parts of the economy in the coming quarters.
Stock Market		Sentiment now appears stretched and valuations are not compelling. To date, market returns have been driven by multiple expansion. EBIT margins climbed to historical highs in the years following COVID lockdowns; elevated input costs and weakening demand and pricing power are posing a risk to the ability of corporations to maintain earnings at their projected level. Returns will be harder to come by and stock selection will be increasingly important.
Bond Market		Interest rates remain well off their lows, as the economy has remained resilient, and the market is weighing the dynamics of still-elevated core inflation and the potential for interest rates to remain higher for longer. Corporate spreads remain well contained, particularly considering the risks we see to the economy.
Important Issues on the Radar		Inflation: Factors including a resilient demand environment and wage increases threaten to keep core services inflation elevated. Should this be the case, the Fed may remain tighter for longer.
		China’s Economy: China has pivoted on the two key economic issues that acted as severe headwinds to growth over the last two years; however, economic growth appears to be stagnating and it will be critical to monitor the policy response in the coming months.

Indicates change Indicates no change

Source: Bloomberg

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.

Returns for the Consumer Price Index represent an estimate of the average price of consumer goods and services purchased by households, given the market price change for a constant basket of goods and services from one period to the next. Index returns provided by Bloomberg.

The S&P 500 Index is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do not reflect any fees or expenses. Dividends are accounted for on a monthly basis. Index returns provided by Bloomberg. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip U.S. stocks that are generally the leaders in their industry. Dividends are reinvested to reflect the actual performance of the underlying securities. The Index returns do not reflect any fees or expenses. Index returns provided by Bloomberg. The NASDAQ Composite Index is a broad-based capitalization-weighted index of domestic and international based common type stocks listed in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The NASDAQ Composite includes over 3,000 companies. The Index returns do not reflect any fees or expenses. Index returns provided by Bloomberg. Index data referenced herein is the property of each index sponsor (London Stock Exchange Group plc and its group undertakings (Russell) and S&P Dow Jones Indices LLC, a division of S&P Global Inc., its affiliates (S&P), their affiliates ("Index Sponsors") and/or their third party suppliers and has been licensed for use by Manning & Napier. The Index Sponsors and their third party suppliers accept no liability in connection with its use. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. For additional disclosure information, please see: https://go.manning-napier.com/benchmark-provisions.