Positive Markets Plus Outsourced Services vs. Manufacturing
Market Commentary

The Markets

The positive markets continue. Last week was a mixed bag as investors weighed positive economic news against concerns that stock prices for some chipmakers may not be sustainable. Here are the highlights:

  • Inflation slowed to zero.
    On Friday, one of the Fed’s favored measures of inflation – the Personal Consumption Expenditures (PCE) Index – showed that headline inflation was flat in May. Both headline inflation and core inflation, which excludes volatile food and energy prices, were up 2.6 percent year over year. That’s a significant improvement from May 2023 when headline inflation was 3.8 percent year over year, and core inflation was 4.6 percent. The Fed’s target is 2.0 percent. Falling inflation bolsters the case for lower interest rates later this year.
  • The banks are alright.
    Every year, the Federal Reserve (Fed) conducts a stress test to see whether “large banks* are sufficiently capitalized and able to lend to households and businesses even in a severe recession. They evaluate the financial resilience of banks by estimating losses, revenues, expenses, and resulting capital levels under hypothetical economic conditions.”
    Recently, the Fed released its report, and all the banks tested – 31 of them – passed. Each bank was able to absorb losses in highly stressful hypothetical scenarios while maintaining its minimum capital requirements.
  • AI stocks were up and down.
    Investors have high expectations for artificial intelligence (AI) chipmakers. As a result, share prices for many chip companies have dramatically increased in value over the past year. Last week, we saw some volatility but in the long term, it seems to be a strong trend.
    Our portfolios have a strong core of holdings in the main parts of the market with complementary placements in technology to provide access to the sector and the AI surge.

How May I Help You?

During the 20th century, manufacturing drove economic growth in many countries. As Japan recovered from the devastation of World War II, it produced inexpensive goods that carried the label, “Made in Japan.” As wages rose, manufacturers moved production and the labels on low-cost goods changed to “Made in China,” “Made in Vietnam,” and “Made in India,” among other places. 

The Economist cited Harvard Professor Dani Rodrik, explaining that manufacturing boosted economic development for three primary reasons. It helped less developed countries: 

  • Produce goods that could be sold in global markets.
  • Improve productivity through technological advancement.
  • Create jobs by putting unskilled laborers to work.

 As manufacturing has become more capital-intensive, we’ve begun to see a change. Instead of pursuing manufacturing, emerging countries are now outsourcing services. Recently, an example of this type of cross-border commerce went viral when a social media post showed a cashier at a Japanese fried chicken joint in New York City working via screen from the Philippines.

 “The importance of services is growing in part because they are gaining some of the attributes of manufacturing. Start with cross-border commerce. Trade in services reached nearly $8 [trillion] last year, up 60% from a decade ago. Trade in manufacturing is three times bigger—but only grew 25% over this period,” reported Arjun Ramani and Mike Bird of The Economist

The sophistication of outsourced services varies. For instance, “The Philippines is a giant when it comes to all kinds of outsourced back-office business. Ghana is Africa’s IT hub. Turkey is known for health tourism…” 

Only time will tell whether service exports can improve standards of living in emerging countries as manufacturing does.

Focus – Think About It

“I am more afraid of an army of 100 sheep led by a lion than an army of 100 lions led by a sheep.”

Charles Talleyrand

IMPORTANT REMINDER: We have an income fund that adjusts its rate on a regular basis that can keep you ahead of inflation and is paying 6.75% on a monthly basis. This would be tax-free in your IRA accounts. Let me know if you have an interest in a possible placement.

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Sources

https://www.bea.gov/news/2024/personal-income-and-outlays-may-2024
https://www.bea.gov/news/2023/personal-income-and-outlays-may-2023
https://www.bloomberg.com/news/articles/2024-06-28/fed-s-favored-price-gauge-rises-at-slowest-pace-in-six-months (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-01-24_Bloomberg_Feds%20Favored%20Inflation%20Gauge%20Slows_3.pdf)
https://www.federalreserve.gov/publications/files/2024-dfast-results-20240626.pdf
https://www.bloomberg.com/news/articles/2024-06-27/micron-s-selloff-shows-risk-of-sky-high-ai-expectations?cmpid=BBD062724_OUS&utm_medium=email&utm_source=newsletter&utm_term=240627&utm_campaign=openamericas (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-01-24_Bloomberg_Microns%20Selloff%20Highlights%20Risk%20of%20Sky-High%20AI%20Inflation_5.pdf)
https://www.investopedia.com/terms/c/correction.asp
https://www.barrons.com/market-data?mod=BOL_TOPNAV (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-01-24_Barrons_Data_7.pdf)
https://www.barrons.com/livecoverage/stock-market-today-062824?mod=hpsubnav (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-01-24_Barrons_Stocks%20Slide%20in%20Last%20Session%20of%20hte%20First%20Half%20of%202024_8.pdf)
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202406
https://www.usnews.com/news/best-countries/rankings/cheap-manufacturing-costs
https://www.economist.com/finance-and-economics/2024/06/24/will-services-make-the-world-rich? (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-01-24_The%20Economist_Will%20Services%20Make%20the%20World%20Rich_11.pdf)
https://x.com/thatguybg/status/1776755582562709823?
https://view.e.economist.com/?qs=a8ea34c95ed87914a5c95a631b201a7b75715f7a02449e8b66c22cb381b9396054fcf79e96433fae52d2403cf70eae6a390a72cca6bc50b15495b865f0fcbb778611b2c99c183e38f936fea66b88d775 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-01-24_The%20Economist_Lessons%20from%20a%20New%20York%20Fried%20Chicken%20Shop_13.pdf)
https://roundupreads.jsc.nasa.gov/roundup/1312

Disclaimers

* These financial views are those of Carson Coaching, not the presenting Representative, the Representative’s Broker/Dealer, or Registered Investment Advisor, and should not be construed as investment advice.
* This newsletter is partially based on one prepared by Carson Coaching. Carson Coaching is not affiliated with the named firm or broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
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* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
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* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
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* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
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* Consult your financial professional before making any investment decision.
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