All three major indexes look to finish the week higher. With Monday being the last day of the quarter, it appears both the S&P 500 and the Nasdaq will close at new all-time highs. Before you break out the expensive champagne, recognize that we’re still only up low single-digits this year, given we closed out 2024 at all-time highs. However, given all that has occurred these first six months, it is a relief that we are where we are. Despite continued fighting in Ukraine, a tariff Armageddon, and Israel’s bombing of Iran, the markets have remained resilient. We have yet to see inflation tick higher, the unemployment rate remains low, and the price of eggs is coming down. What more can you ask for?
Without getting into too much detail, I thought you might be interested to know what has outperformed versus what has underperformed so far this year. It may surprise you. The top three sectors YTD are Industrials, Utilities, and Consumer Staples with returns of 8.50%, 7.50%, and 5.5% respectively (through June 20th per JPMorgan). The bottom three sectors include Technology, Health Care, and Consumer Discretionary with YTD returns of 2.20%, -3.20%, and -7.10% respectively. Valuations are once more stretched to the upside with NVIDIA regaining its throne as the largest company by market capitalization. In fact, it is a stones throw away from breaking a $4 trillion market cap which no other company has ever done. Are we priced for perfection? Perhaps things have recovered a little too well, but if Jerome Powell’s testimony is evidence, the economy remains strong enough.
As for monetary policy, Jerome Powell again reiterated at the House Financial Services Committee semiannual address that the economic data does not warrant an interest rate cut. While inflation remains tame, the economic backdrop, while cooling, is not exactly weak. Powell declined to give a definitive response to determining when a rate cut may occur, stating that inflation data over the next few months will provide the answer. The largest banks have lowered their forecasts again, now expecting only one rate cut in 2025, possibly happening in December. It all depends on what happens with inflation, and whether the unemployment rate rises. We’ll have to wait a bit longer to see how this plays out.
In company news, Nike reported that the current tariffs in place could lead to an additional cost increase of $1 billion for the company. While it plans to reduce its reliance on China by reallocating supply to other countries around the world, it will still have to contend with the increased costs. The good news is that more companies are reporting they will not pass along the entire cost to consumers. Recent surveys indicate that many companies plan on eating about half of the costs, finding ways to reduce expenses through partner arrangements with suppliers, and passing on only a small portion of the tariffs.
In closing, I read today that the average age of a passenger car in the U.S. is now 14.5 years old. It wasn’t that long ago that a 10-year-old car was considered “old.” Those days appear to be long gone. The average cost to own and operate an automobile jumped 30% over the past decade, thanks to more expensive payments, soaring insurance costs, and high-priced repairs, according to the Wall Street Journal. While this could speak to the durability of modern cars, it more likely speaks to changes in consumer purchasing behavior and economic conditions. The average price of a new car is $47,962 according to Experian, with many luxury models now topping $100,000. Perhaps more troubling is that the average price of a used car is now around $26,000-$28,000 according to Kelley Blue Book. Coupled with an average interest rate for a new car loan of around 6.75%, it is no wonder people are holding on to their cars longer. Now you know.
Bruce J. Mason, MBA
