May 2024 Perspective

May 1, 2024

What’s New

If April showers bring May flowers, then perhaps investors can rejoice that April is over and look forward to better times in May.

US equities struggled last month, with the S&P 500, Dow Jones Industrial Average, and Nasdaq all falling by 4.16%, 5.00%, and 4.41%, respectively. While earnings releases are to blame in some cases, the broader picture continues to be one of rising sovereign rates acting as a headwind to equity market returns.

Rates were likely driven higher by a number of factors, including inflation and a still-resilient US economy.

Regarding inflation, the Consumer Price Index (CPI) reported in early April ticked up to 3.5% and led to a further pricing out of rate cuts from the Fed this year.

The market had been pricing three cuts by the end of 2024, with the first coming in June, prior to the release. By month-end, we were down to one cut on the year, likely in September. At issue is the fact that core services inflation has stalled well above trend – and has now modestly accelerated. Resuming the downward trend here will be key to allowing the Federal Reserve (Fed) to declare victory in its fight against inflation.

While economic growth showed a marked deceleration from last quarter, domestic consumption in the form of consumer spending and fixed investment continued to plug along at a healthy clip. This combination of sticky inflation and a resilient US consumer likely pushed yields higher through the month, with the 2-year and 10-year US Treasury yield rising by 41 basis points and 48 basis points, respectively, to 5.03% and 4.68%.

Our Perspective

Much like last month, we continue to see risks to markets. Rising rates may yet again begin to pressure borrowers, especially small and medium-sized businesses. Inflation is no longer falling at the pace it was, highlighted by core services inflation ex. shelter which has stalled out at a level well above pre-COVID levels.

Meanwhile, valuations are far from attractive at a broad level, and it leaves us wondering what many market participants are playing for.

However, we have continued to find opportunities in the market.

Although the market is pricing in a soft-landing scenario, we believe that one is unlikely as we progress through the economic cycle. Historical evidence suggests that the Fed has never brought inflation down from the levels we’ve seen without causing significant economic hardship.

With only one cut planned for the year, we’re closely monitoring 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.

AI’s Five Minutes of Fame?

Is Artificial Intelligence (AI) having its five-minutes of fame… or is there more to the story?

We have been following AI at Manning & Napier for decades, and despite the recent buzz, AI is not a new concept.

Scientist Alan Turing wrote the first AI manifesto, “Intelligent Machinery” in 1948. Eight years later, Dartmouth College held a workshop where the term “artificial intelligence” was coined to describe machines that could simulate human behavior. AI has undergone continuous cycles of development, disillusionment, and progress in the decades that followed. Each iteration has built on the work of the previous cycle, getting closer to a state in which machines will achieve full parity with, and ultimately exceed, the capabilities of the human mind.

Years of experience lead us to believe that we still have a way to go before we reach that final state. Research firm, Gartner, developed a five-stage visual framework for technology hype cycles. A new technology emerges, generates tremendous enthusiasm, and then falls short of inflated expectations. Eventually, practical applications emerge and mass adoption takes hold.

Continue reading our thoughts in the full article: The AI Hype Cycle.

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:

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