Making Sense: June Market Update

Amy: Hello, everyone. I'm Amy Thomas, a strategist here at First Citizens Bank. I'm joined by Phil Neuhart, Director of Market and Economic Research, and Blake Taylor, Market and Economic Research Analyst, who is filling in for Brent Ciliano today, who has become quite the road warrior these days.

I want to welcome you to our monthly Making Sense: Market Update series. We received a number of questions through the team's website at FirstCitizens.com/MarketOutlook, and we will answer as many as possible during today's session. If we're not able to answer your question, please reach out to your First Citizens partner or connect with one at FirstCitizens.com/Wealth. As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. If you have any questions or concerns about your financial plan, please reach out to your First Citizens partner. Phil, with that, we are ready to go. So I'll turn it over to you.

Phil: Thank you, Amy, and thank you, Blake, for joining us again with Brent on the road. Let's jump right into what we're going to cover today. Well, one, the economy. There is a lot happening on the interest rate front when you think about the Fed, inflation, getting some interesting data we want to talk about there. And of course, the labor market, where we might be seeing a little bit of loosening. On the market side, we will talk equity and fixed income, of course, and some potential headwinds. So let's jump right into the economy.

So looking at the global economy, what have we seen last year and so far this year? One, the world grew at 3.2% in terms of economic growth last year. Coming into this year, 2024, as of December of last year, expectations were for 2.6% growth. That has now been revised up to 3%. Look at the US. Expectations were 1.3%. Now it's 2.3%. In fact, every region we show here has seen an upward revision except Japan, which has some issues of its own, especially relative to the yen.

When you look at this data, what you'll notice also is that the US is the leader, right, really the leader in the clubhouse, particularly in the developed world. China is outgrowing us, but really at a much slower pace than they had been prior to the pandemic. So the truth is, when you think about why have markets performed so well so far this year, some of it's just that the bear case—the probability of the bear case—has come down and you're seeing a higher probability of something like a soft landing or maybe no landing.

Blake: Yeah, big developed economies have just proved far more resilient than expected 6 months ago.

Phil: That's right. And that's really finding its way into markets. So as we flip ahead, let's look at the US specifically. Here we are showing that 2024 GDP growth estimate through time. What you'll notice is as of last summer, summer 2023, expectations were for sub-1% growth. Well, that's dangerously close to recessionary type numbers. And what we've really seen is a dramatic increase in growth estimates so far coming into today for 2024. So, again, that probability of the bear case seems to be lessening, and there's a lot of optimism and that's finding its way into risk assets. So, Blake, all focus has been on the Fed. What are we seeing on that front?

Blake: Well, it's important to note that in the last few years, big global central banks and developed markets changed their monetary policies almost in exact synchronicity. As you can see, since 2020, the European Central Bank, Bank of England and the Fed all slashed interest rates down to the zero lower bound, and then almost at exactly the same time jacked them up to multi-decade highs.

Compare that to 15, 20 years ago, and you can kind of see in this chart that the broad trends of hiking and cutting were approximately the same, but the severity of those hikes and cuts was very different, reflecting the different patterns going on in each of those regions.

But now look how tight the relationship has been for the last few years. And forecasters expect that to continue with the European Central Bank having already made its first interest rate cut and market pricing implying that the US Fed and the Bank of England are going to be coming just behind.

So the question going forward is, does this tight relationship stay, or do we return back to more variance in where interest rates end up? And it's going to be interesting to watch. But what we have seen in the United States is that monetary policy has been elevated and on hold for quite a substantial period. It's been almost a year, it's hard to believe, since the Fed enacted its last interest rate hike in July of 2023. In 3 months, we might be getting our first interest rate cut as implied by market pricing. Markets are expecting that cut to come in the September meeting. So that would leave us at 14 months—between July 2023 and September—of monetary policy being fairly restrictive. That's actually quite a while. I looked up yesterday what are things that took 14 months and like the Empire State Building took 14 months to build. So it is quite a while. And as you can see, it hasn't been since 2006 and 1997 when it's been longer that interest rates have been tight and flat.

Phil: It's a long time for the economy to absorb an elevated rate. And it's sort of surprising the degree which the economy has absorbed it. When you look at these past periods tend to precede a recession historically.

Blake: Yes. The thing is, though, there definitely is precedent for this monetary policy to be on hold for quite a while. The 1990s were a time of pretty stable policy rates. So we'll see what happens here, but it has been quite notable just how long rates have been on hold.

Now a bit of an elephant in the room that's starting to come out in monetary policy and macroeconomic discussions is—are interest rates actually doing the job that policymakers thought they would? When those hikes were ended or when we reached the elevated rate in July of last year, a lot of analysts and forecasters expected those interest rates to bite. And of course, we have seen a lot of normalization and even some softening in some places of the economy.

But the Federal Reserve and central banks don't have a dial that directly changes inflation or aggregate demand or even the stock market. What central banks change are basically just short-term policy rates. And the mechanism through which that affects the economy is what we call financial conditions. And financial conditions typically tighten when monetary policy becomes restrictive.

What we've seen, especially this year, is that financial conditions have remained very loose. And we were struck by a speech that one of the regional Federal Reserve Bank presidents gave last week where he highlighted some of the specifics behind these easy financial conditions at a time when monetary policy has been restrictive. He noted that credit availability to most businesses, households and municipalities remains available. There's robust issuance in capital markets, ample financing for credit markets. There's been modest bank loan growth. Businesses with access to capital markets are taking advantage of compressed credit spreads. M&A activity is up, margin debt is rising. All things that you would think are consistent with monetary policy and financial conditions being easy, not with the Fed trying to tighten economic activity.

Phil: Yeah, you can see the Fed started tightening in 2022 and financial conditions tightened, right? They're below that zero line. That's sort of the playbook. What's surprising is how loose they are now, given that the Fed has not loosened policy, right? That is really the surprise, and I think something that may have taken the Fed even by surprise so far this year.

So why is the Fed keeping policy tight? Well, it's inflation, right? And here we're showing both the personal consumption expenditure deflator and the consumer price index. What you'll notice is, of course, extremely high inflation in 2022. A nice move down, kind of almost a straight line move down, closer to the Fed's target rate of 2%, which is that dashed line there. But you'll notice that we are still above that target rate. And this is the push and pull. The Fed has a dual mandate of price stability—in other words inflation—and full employment. We'll talk about the labor market in a moment. Well, we have not yet reached that 2% target. Do we have to get and stay at 2.0% for the Fed to be happy? I'm not so sure, but we still have work to do. This is a new measure we're using. Blake, would you like to dig in just a little bit on how we are calculating this?

Blake: Yeah, we saw the presentation of this inflation data in a note from a trade association called the Bank Policy Institute. And what was striking to us or what we saw as helpful was it cuts through a lot of the noise that you might hear in trying to understand what's the current inflation picture. There are so many different cuts of the inflation data that analysts and even policy makers themselves will talk about. There's cores and super cores and you can look back 1 month, 3 months, 6 months and it's sometimes very difficult to know okay well which one should we look at?

Phil: Right.

Blake: This one is, it looks at inflation over the last year, but it overweights the most recent data.

Phil: Which is the most important data.

Blake: Of course. And what it shows is that there was a huge amount of progress over the last couple of years in bringing inflation down. But for the last several months, it has seemed to flatten out around three instead of two. As you say, it is close. We're going to find out in coming months just what policymakers' appetite might be for dragging it all the way down to that 2% target.

Phil: That's right. So we alluded to the full employment side of the dual mandate of the Fed. So let's look at the unemployment rate here. So one, you'll notice we're at 4% unemployment. That is up from the low of January 2023 of 3.4%. But look how low it still is historically. So this is tough for the Fed because what you're seeing is rising unemployment, but in the context of still job gains, right—we're seeing that in the establishment survey—and what is still low unemployment historically.

Now, one thing I'll point out is rarely do you see unemployment start to rise and just flatten out, right? You can see periods where it just sort of moves sideways, but often it continues to rise. This is why the Fed's job is getting harder and why us and many others think we're getting close to the point where the Fed probably should start cutting because you've seen progress on inflation and unemployment is on the rise. Fresh data will be coming out in about a week on this, which will be important. But it's becoming much more of an interesting picture, I think, from a growth perspective.

Blake: Yeah. A theme that we've been advancing is the economy has been normalizing for the last couple of years. So there's so much distortion, particularly in the labor market. And so some softening was actually welcomed.

Phil: Yes.

Blake: But it is a spectrum, though. As that softening continues, at some point, will we cross between that being normalizing and that being a little bit excessive weakening? So it's why we're paying even more attention than usual to the labor market.

Phil: And why is the labor market so important? Well, 70% of US GDP is consumption. So what are we seeing on the consumption side? Interestingly, we've had some disappointing retail sales data of late, but consumption seems to be hanging in. What are we seeing in those dynamics?

Blake: Yeah, well, for the last few years, it has been services spending that has kept consumption growth positive, especially in real terms. And those disappointing retail sales numbers do have us wondering who is it that's keeping US consumption growth afloat and even robust. And we are a little bit not concerned, but again, as I just mentioned, we are keeping eye on this normalizing and consumption growth, particularly in the services sector, was so extreme for the post-pandemic years that some softening was welcomed. But we'll be looking very closely to tomorrow's PCE data on income and spending to get the latest picture on how US consumers are holding up.

Phil: Yeah. Consumption data is always important. It does feel a little bit more important than maybe 6 months ago, just because we're seeing some softening potentially and something we're really going to have to watch. I think the market's going to watch really carefully as well.

Blake: Well, one area where we have seen a lot of real effect from the Fed's interest rate hikes and a tightening of financial conditions has been in lower-end households and borrowers. So what we're showing here is the credit card delinquency and interest rates. So if you look at this gold line, 30-day credit card delinquency rates are actually above now where they were before the pandemic.

In 2021, 2022, they really hit rock bottom as household income was very elevated and overall and households were paying down their debts. That was never going to last forever. We've talked about how household savings have gotten back to normal. And part of what has been driving this has been a surge in the credit card interest rate. So as we mentioned a few slides ago about financial conditions remaining accommodative in many parts of the economy, this is one where it really is starting to bite. And, unfortunately, it is for lower-income and lower-credit-score borrowers, as we've seen in the data.

Phil: What we saw is when inflation initially began to accelerate a couple of years ago, revolving credit or credit card usage start to really spike. Why is that? If you're living paycheck to paycheck, there's a lot of inflation. You have to find that money somewhere and where people are finding it is on their credit cards. So what we are showing here is that the usage is up. So you have credit card usage skyrocketing. And at the same time that interest rate goes up. Well, that's a problem, right? Because it's more expensive to cover your bills. This is something that we are watching.

The growth of two Americas and the separation there is something we've talked about for years. The pandemic, you could argue, in some ways exacerbated it. It's not that everyone in America is doing well when you look at the aggregate data.

Speaking to that point, let's talk about the housing market. Housing has really been fascinating the last few years. Not that long ago, what were we saying? The housing market's just locked up. We all locked in low mortgage rates, the homeowners did, and are very unlikely to list our home. And what has that driven? Well, it's driven really weak existing home sales. And it continued to drive for some time housing starts.

But now what we're seeing is housing starts are weakening as well. And why is that? What we're showing here, the month's supply of homes. What is month's supply? It is the number of months it would take you to sell the inventory of homes. Now what you'll notice is this number is still pretty low versus history. It's not that we suddenly have a loose housing market, but you'll notice it is loosening, including in recent months. This is interesting. All of a sudden, there's a little bit more inventory. If you look at just raw inventory data, also above where it was at any point last year. Again, it’s not that suddenly we have a loose housing market but loosening.

What is interesting though is home price appreciation persists, and actually just this week we had data that surprised to the upside. That should start to dissipate, right? In economics, if there's supply increasing and demand is still weak, well, that should start to affect price. So far, it has not. This is a problem for the Fed when you think about just owner's equivalent rent as a major inflation measure, but something that we are watching carefully.

I think the narrative around the housing market is changing a bit. What could loosen this up? Well, some of it's mortgage rates coming down. It's one of the many arguments people make for the Fed cutting, but remains quite an interesting housing market to say the least.

So let's turn to the market. Let's start with what does performance look like? So first of all, year to date, we've had a pretty incredible run in markets. You can see US equities have been the leader, right? Depending on which index you're looking at, near 14 to 15% gains year to date. They've outperformed international developed and emerging markets, but both of those have participated as well. The truth is risk assets around the world have performed. The US has been the leader. That is something we've talked about a lot really since the Great Financial Crisis.

If you look inside those US equity returns on the right side, what you'll notice is large-cap growth continues to be the leader. We talked a lot over the last year-and-a-half about the Magnificent 7. Maybe it's the Magnificent 5 now. But those large-cap growth names have driven the majority of returns. But what's interesting is other asset classes are doing okay as well. Large-cap value up 9%, really halfway through the year. That's a great year. Mid-cap up. Small-cap has been the laggard. And why is that? Small-cap is more exposed to interest rates. And interest rates have risen this year. The expectations around Fed cuts have come down, and that has impacted small-caps more than bigger names. So do we have a narrow market? Yes. But are there other places that are seeing positive returns? The answer is yes, there as well.

So what is the path we've come from just as a reminder? Since October of 2022, which remember we had a big sell down 2022. The market was pricing that we were going to have a recession which did not happen in 2023. The truth is we just had a really remarkable rally—up 52% from the October 2022. Up 32% from just last October. A lot of good news is priced into this market. You cannot look at the market and not acknowledge that. Lots of good news. In terms of that breadth that I mentioned, what are we seeing there?

Blake: Well, it's impossible to avoid the story now that a lot of this appreciation has been driven by the largest companies. So what we're showing here is the S&P 500 cut two different ways. The first one, the gold line is the conventional way to view the market-cap-weighted S&P 500. That one is up 42% from the beginning of 2023 to today. However, if we weigh all 500 companies in the S&P 500 equally, that's up only 17%. So we can see these followed somewhat closely for the first several months of 2023. But after that, and especially very recently—look over just the last few months—the equal-weighted index has been roughly flat, while the bigger companies have been strongly, strongly outperforming.

Phil: This is something you hear a lot, particularly in the financial press. Can the market rally continue if it's just the largest companies? Well, historically, often what you see is the answer is yes because the market broadens out. The truth is over the last year-and-a-half, it's broadened out at points, but not consistently. And what's the market done? It's continued to rise. So the answer is, well, sure, it can continue to rise, but we would love to see some broadening in the market, absolutely.

Blake: Right. And then another thing that we continue to hear is that equities are expensive. And judging by historical averages, yes, that is the case. They are above their average. But one important thing to note here that we have repeated over the last few months is that the market rarely trades right at that historical average. So we are above it. But we are below other peaks, but the market typically is either below or above that average.

Phil: Yeah. Look, the market-price-to-earnings ratio is not a very good short-term predictor of return, right? It doesn't tell you much. The market can be cheap or expensive for quite some time. Over the very long term—longer term than many of our clients are thinking day to day—it can be a better predictor, but certainly you can't look at the market as a whole and say it's cheap or even average. It is quite expensive. What about the details, Blake, on valuations?

Blake: Right. The top 10 companies, as compared to the other 490 companies in the S&P 500, do have a much higher price-to-forward earnings. That's impossible to ignore. And look how those usually follow quite closely until the pandemic. So if this abnormality is going to correct itself at some point, is it going to be from the top 10 coming back down or from the other 490 coming up? And we think that there is some reason to justify the view that it might be from the companies outside the biggest ones coming back up. And that has to do with the higher margins that the companies are now enjoying.

Phil: Yes, the market as a whole is expensive, but a lot of that actually is just the top 10. It's really not that all companies look expensive. So let's talk about some of the details of company fundamentals. So here we're showing the percent of the largest 3000 US equities with gross margin over 60%. In other words high gross margin—and we love gross margin as investors, right? What you'll notice is it's about 25% of companies have greater than 60% gross margin.

Look how high that is compared to historicals. There's a lot of reasons for this. Technology, productivity, companies locking in low interest rates. But the truth is there's some pretty good fundamentals in the marketplace well outside of just, say, 10 names or seven names. There are some good fundamentals. And the market tends to reward those fundamentals, as we flip ahead.

So if you look at the median enterprise-value-to-forecasted sales by gross margin, high gross margin on the left basically means more expensive. What does that mean? That means market up, right? That means price up. EV-to-sales is just another metric for valuation. Low gross margin tend to be cheaper companies. This makes a lot of sense. Companies that make money, you should be willing to pay more for. Then a company that does not make a lot of money, you should be willing to pay less. What does that mean? That means there's potential for broadening because remember, we just showed that more than normal, a higher-than-normal percentage of companies have elevated gross margin today. This is a good sign for the market potentially.

As we flip ahead, what about other fundamentals in the market? Well, earnings growth this year is pacing north of 11%. We do have an earnings season about to kick off in a week or two. That is well above average. Long-term average is 7.6%. Looking ahead to next year, 2025, estimated earnings growth of 14%. Analysts haven't really sharpened their pencil on next year yet. I wouldn't be surprised to see that number come down. But nonetheless, at least right now, analysts are pretty confident on earnings.

Maybe more importantly than actual earnings growth is the right side. This is estimated next 12-month operating margins. Investors love to see margin. And what you'll notice is we had record margins after the pandemic, right? Well, why is that? When interest rates are very low and there's a lot of fiscal monetary stimulus, you're going to have the higher margins. Well, it was very predictable that was going to come down, and it did. We had inflation, we had wage inflation, et cetera. But now we've seen a nice turn up, and that upswing has been pretty sustained. We've been showing this for some time. When you think about why is the market rallied so much since late 2022? I think this chart tells you the story. The truth is fundamentals improved. The bear case did not play out and that has improved margin expectations.

So where do we stand? Our price target is 5,500 on the S&P. We've been there now for a while. The market is trading just below it. Our bull case—which maybe is the scenario that's playing out or the higher probability scenario as we move through time—is 6,000. That's about 10% from where we are. As a reminder, this is next 12-month price target. We update this generally on a quarterly basis. So we will be updating this next month. It is getting long in the tooth as of this point. So that's equities. What about fixed income, Blake?

Blake: Well, the yield curve remains inverted now for almost 2 years. And of course, that is a highly abnormal relationship. It's not quite as inverted as it was 6 months ago. But with the Fed having not yet cut interest rates, the short end of the curve is still over 5% and the long end of the curve is still in the fours. So how long can this relationship go on? We don't know because it has lasted far longer than expected when the Fed started raising interest rates a few years ago. This will come down likely according to market pricing based on what we're expecting for the Fed's next move, but the question is going to be what's going to happen at that long end? Is it going to stay roughly where it is and will the curve uninvert by the short end coming even further down? Or is it possible that the long end might rise?

Phil: This is really the—if we knew that answer, we could tell you a lot about what's happening in the world. It's the mystery. It is not normal to see a yield curve this inverted for this long.

Blake: But there is opportunity in fixed income in a way there hasn't been in many, many years. Compared to the end of the pandemic, the major benchmark Treasuries and fixed-income indices are yielding multiple more percentage points than they did a few years ago.

Phil: It really is an opportunity for investors. Look at the aggregate bond at 4.9%. That was 1.75% when we started 2022. Not that long ago.

Blake: Right. However, not all is well in the world of government finances. Just in the last few years, the United States debt-to-GDP ratio has risen by over 20 percentage points. That's coming after just in the last 15 years the debt-to-GDP ratio has risen from 40% now all the way up to 100%. Compare that to the entire period since World War II, debt-to-GDP was range-bound somewhere between about 20% and 50%. So after the global financial crisis, there was a huge step up in government debt. In the pandemic, there was another huge step up because of all the massive fiscal response and the weak economy.

And importantly, a lot of this has actually come at a time when the economy has been very strong. Think about the 2015-to-2020 period. That was a generational low in unemployment. If anything, that's a time when historically the government would have been running a narrower budget deficit—if not a balanced budget, like in the late 90s and early 2000s. So this really poses a significant quandary for the Treasury and maybe even the Fed at some point.

And why does this matter? There has been a lot of policy analysts and concerned citizens have cared about the budget deficit for a long time, but investors haven't paid as much attention to it because interest rates were very low. So there wasn't a problem with the government financing very large deficits and the growing debt-to-GDP ratio was kept somewhat under control. What's different is that now the government is being required to pay substantially more to finance the debt. Net-interest costs alone have risen the last few years to consume 3% of all federal outlays compared to just over 1% for the last 10-plus years.

Phil: Yeah, as a percentage of GDP. I mean, look at this, that purple line. And there's no reason to think that doesn't move higher as low-interest bonds mature and are rolled into higher-interest bonds.

Blake: Right. That purple line is just going to rise ever higher. So this is what causes a bind in federal finances.

Phil: So how is this fixed? Well, the answer is there's not an easy solution. Here we're showing various types of government spending as a percentage of GDP. Nondiscretionary, net interest and mandatory. Mandatory is things like Social Security, Medicare. There's no choice but to spend that. Discretionary is things like defense and non-defense. What you'll notice is look how small discretionary is relative to nondiscretionary. Those gold and blue bars are really small as a percentage of the total. In fact, only 28% of government outlays are discretionary.

So when we say, oh, the government, you know, flip the switch and spend less, well that alone does not really solve it. The truth is it takes a lot of reform to fix this. A lot of those reforms would be politically unpopular and very difficult for politicians to swallow. So this is not an easy fix. And in some ways you need GDP to bail us out. You need that denominator, the growth of the economy to bail us out.

So this excess debt, what has it driven? Well, it's driven more Treasury issuance. Here we're showing monthly Treasury issuance by maturity, 2-year all the way up to 30-year. And what you'll notice is, it came down for a little bit after the pandemic and now is rising. You'd expect for it to continue to rise, honestly. And we are already well above pre-pandemic levels, as you can see here.

Treasury issuance, putting more debt on, it has impacts, right? You might say, well, why does this matter for me? Well, I think the answer is, and we think the answer is, it finds its way into interest rates. If there's a lot more issuance, that term premium goes up, and suddenly you have an issue where there's a floor under how low Treasury yields can go, that has impacts on everything. That means the interest rates are just structurally higher. This remains something we are watching carefully. We do not give a presentation when we're on the road in which we do not get asked about deficits. This is on investors' minds.

Blake: Over the last several years, not only did markets get accustomed to very low interest rates, but also very low term premium. The return of higher rates and also higher term premium is causing things to change that we haven't seen in years.

Phil: It's a move to normality, and the government's having to take their medicine like the rest of us with higher rates. So you might have heard it's a presidential election year. We get the question often, you know, "How do I invest around elections?" Well, the answer is focus on fundamentals. The truth is, as we say here, partisan strategies require staying uninvested for long periods, right? So if you had $10,000 in the S&P 500 since 1953, and you invested only during Republican presidencies, that's $83,000. If you invested only during Democratic presidencies, that's $215,000. If you just stayed invested all years, it's $1.8 million, right?

We all can think back to periods in which President X was in office and the market was going up a lot. President Y was in office and the market was going up a lot. And those presidents might be of different parties. So our guidance is don't read too much into politics. Yes, can politics drive volatility in the markets? Absolutely. But very quickly, the market goes to—what do earnings look like? What does the economy look like? And those cycles are independent of the political cycle is the truth. Recessions can happen under presidents of either party and congressional makeups of either party as well.

Blake: And something we've seen in the last 48 years is markets have reacted, they've absorbed a lot of policy uncertainty—they perform much better than expected given that uncertainty.

Phil: Absolutely. Times when a certain bill would pass, you say, well, the market must go down on that. The truth is the market has outperformed in many of those cases.

Amy: Well, Blake, Phil, thank you so much for all that information. You certainly paint a broad picture of both markets and the economy.

Just a reminder to anyone who may be interested in staying informed throughout the month, we have several publications available for our subscribers, including a weekly economic outlook from Phil and Blake in our In Brief series. That's delivered at the start of every single week. We also keep you informed on what the Federal Reserve is doing, what inflation reports look like throughout that subscription as well. If you're not already subscribed, you can use the QR code on the screen to get signed up. And you can also visit FirstCitizens.com/MarketOutlook.

Phil, Blake, let's jump into some questions here. I'll just go back one slide because the number one question that we have been getting is around the election year and what that means. Today happens to be the day of the presidential debate. Phil, what are you going to be listening for during that broadcast?

Phil: Well, one, we will be listening carefully to the broadcast. Obviously, any policy, any clear policies will be important to us that come out of either the current president or the former president. The truth, though, is generally debates don't change polling numbers that much. People have made up their minds often. This debate is earlier in the presidential cycle than normal. Does that change things? Maybe. We're interested. But again, as we showed here, we aren't investing on it, right? We make investments for the long term, and we're looking at fundamentals, not what's happening in presidential polls, for example. So while it matters to us as citizens, it's not something we would be swinging investments around.

Blake: I think a great lesson to what you're saying is that in recent elections, we've seen the market reprice its expectation from various candidates winning or not winning. So even if an investor was somehow able to have an edge in an election outcome, there's no guarantee that you can get the other half of it, which is how are these candidates or these political parties going to affect market outcomes?

Phil: That's right. The market often trades differently than investors expect in conversations we have. We see the market outperform even with a certain president, one or another in office. Very quickly, the market looks past Washington and looks to the real economy.

Blake: Absolutely.

Amy: Hey, Blake, another question we're getting a lot of is around the housing market, something that impacts everyone. As we mentioned, there's been a lot of conflicting data lately. What are your thoughts around that and where we may go from here?

Blake: Yeah, what you call conflicting data, I guess I would think of as you have, as we showed, rising supply, moderating demand—yet at the same time, record-high price levels. So that's an imbalance that I would think would normalize at some point, so which one of those is going to give? If you can think back—there's our supply chart here—yes, it is up from 2 years ago, but look at just how low that is compared to the last decade. Individuals and families will need to move as life happens to them. So supply seems likely to continue to normalize. With these high interest rates, it's possible we could get some improvement, some moderating in the mortgage rate, which would stimulate demand somewhat. But in the meantime, it really is unusual to me that you have this inconsistency between supply, demand and continued price growth.

Phil: And it's really hurting affordability for the average American, right? You have high mortgage rates, which of course makes the mortgage more expensive, and prices continue to go up really to a surprising degree. Do we start to see some moderation in price appreciation? My bet is yes. But when does that come I think is really a fair question. And for now, it's just that homeownership is very unaffordable and likely that does not change anytime soon.

Blake: Yeah. Anecdotally, we have been seeing some cuts in asking prices. That's not necessarily a decline in price levels.

Phil: If you listed a home for 20% above what it was 2 years ago and you cut that price by 3%, it's still a lot of price appreciation, right?

Blake: It's a sign of moderating price growth.

Phil: That's right.

Amy: Phil, another question we're getting is around the market rally. We continue to see markets go up throughout this year. Just want to get your thoughts around volatility in the future months as we head towards the second half of the year.

Phil: Right. We've had an incredible rally in the stock market so far this year. Our largest peak-to-trough selldown was 5%. On average, the market peak-to-trough in a given year sells off 15%. So just to give you a sense of just the dramatic move up and you can see it here. You can just see that little 5% correction.

Yeah, if you ask me, do we have some volatility this year? Yes. Right? One, we're entering summer months, lower volume that can drive some volatility. Additionally, we have an election which we discussed in detail that can drive volatility. So, no, I don't think markets just move up in a straight line. That does not mean that we can't still have a really good year. I think we do. But if the question is—does the market just keep marching up in this sort of form? I'm skeptical of that. I think that we've come a long ways and a little bit of bouncing around might actually be a healthy thing. We in markets will often call it consolidation, right? A little bit consolidation in the market would be okay in my view.

Amy: Well, Phil, Blake, thank you so much for answering questions and sharing all of that information about the markets and the economy. I want to thank everyone for joining today. We will be back again next month, and we will hope to see you here then. Thank you so much.

Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

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