In my last publication, I discussed a weakening economy and a resulting higher rate of disinflation – we had made significant progress in cooling off inflation. In this piece, I will continue to highlight this progress, however such progress does come at a cost. The most recent CPI print for June came at a decline of 0.1% from May, putting the 12-month rate at 3%, around the lowest in more than three years. Excluding food and energy costs (often volatile costs), the Core CPI increased 0.1% monthly, which is a 3.3% increase from one year ago. This was the smallest annual increase since April of 2021.

The Fed has admitted that the data gives them more reason to begin cutting rates this year, and more likely more than once. My base case this year has been for 2-3 cuts in the 0.50% to 0.75% range by the end of the year and with this most recent data print, that seems more and more likely.   While cooling inflation is a great thing, it also comes at a cost, and that cost is a weaker economy. The post Covid economic resurgence that many had enjoyed was not a sustainable rate of growth. I’ve stated this numerous times. As we head to a more normalized economy and labor market, the real question that should be asked is how weak can the economy get. The case has been made repeatedly about the Fed easing policy enough to achieve equilibrium in the economy – where the economy still grows as an acceptable pace and inflation remains at or around the 2.5% inflation target. However, historically the probability of this is very low.

The Fed has been famous for choking off an overheating economy enough where it is not able to ease quick enough and the economy falls into recession.   It is prudent that we remain cognizant of this possibility as the market continues to make new highs and has not yet priced in this type of scenario. What the Fed says later this year and into 2025 will hold even more weight than it has in past years as we can track economic data trends and Fed’s reactions to what is happening in the economy. As it stands now, the trend is a weakening labor market and weakening GDP. If this trend levels off, we can probably sleep a little easier. If this trend continues into contraction, we must act accordingly.  

While timing the market is an imperfect feat, adjusting positioning in portfolios is prudent of any advisor to set proper expectations and limit adverse outcomes. My hunch is we will want to take a more conservative approach in 2025, but I will continue to track the data very closely and act for my clients as I see fit.   I want to reiterate that I am not sounding off any alarms right now. We are absolutely due for a pullback and/or correction, especially in technology stocks. Seeing the small cap rally gives me confidence that the market is not looking to price in a recession just yet. But if the data continues this trajectory, we will want to be ahead of the market if we can.   Thank you for taking the time to read and please do not hesitate to reach out with any questions.      

Mike Lambrechts