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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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.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.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://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://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)


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