June 3-7, 2024

Tactical Signal 9

Following May’s solid gains, our technical indicators have normalized at support levels to maintain a fully invested position (100%).

Following April's broad market decline, where the S&P 500 lost 4.08%, May ended on a high note, gaining 4.96%. This rebound was fueled by significant gains in Technology and Communications stocks, which rose by 8.47% and 6.28%, respectively. The charge was led by AI chip giant NVIDIA, which saw a remarkable increase of 26.89%. Apple, largely absent from the year's rally, surged by 13% in May, driven by expectations of share buybacks, improved iPhone shipments, and anticipated hardware upgrades.

There was a modest recovery in the bond market with a 1.70% gain, cutting into its year-to-date losses. This was due to narrowing bond yields, although the market is expected to remain bearish and volatile until inflation pressures ease. The Federal Reserve's monetary policy trajectory remains unclear in the short term, following a muted interest rate decision from the latest FOMC meeting and the in-line Personal Consumption Expenditures (PCE) inflation data release of 0.3%. In the long term, the current high-interest rate environment will increase pressure on the federal government to service interest costs, as the national debt now exceeds $34 trillion.

As key economic indicators reflect signs of a softening economy, the market eagerly anticipates the forthcoming FOMC interest rate decision on June 11-12. Last week's lower GDP and Real Consumer Spending figures have set favorable expectations for a slowing economic landscape, which this week's reports will further inform on Factory Orders, Job Openings, and the Unemployment Rate.

"The G7 has collectively recognized the need to protect our workers and businesses from unfair practices. And overcapacity threatens the viability of firms around the world, including in emerging markets. I believe it also poses a challenge to China's growth."

— Remarks by Secretary of the Treasury Janet L. Yellen at Press Conference Ahead of the G7 Finance Ministers and Central Bank Governors Meetings, May 23, 2024 

The Great Wealth Transfer from the Greatest Generation

Blood is thicker than water, which will soon be put to the test in the greatest wealth transfer ever seen.  Recently, Cerulli has predicted that with almost all the Boomer generation into retirement, the massive wealth transfer estimated to be $84 trillion has started.  Between now and 2045, $78 trillion of that will be transferred, upon death, to heirs of Boomers with at least $2 trillion a year until it peaks at a forecasted $5 trillion a year in the 2040s.  Yes, trillions!

Gen Xers stand to benefit the most, and surely, this will lead to a complex and dynamic impact on most aspects of their lives. Given what we know about the differences in attitudes and behaviors of Generation X and Millennials, this unprecedented wealth transfer creates not only financial complexity when considering taxation and financial service support but also quite different spending habits.
I'm trying to imagine financial plans for the future.

The common trope for Boomers was how to work tirelessly, if not obsessively, but 'spending" was more like saving and investing for this generation.  Can you say delayed gratification?  If that wasn't enough, the Boomers have been recipients of quite good returns on those investments, with the Stock market up 4000% since 1969 and housing prices up about 2.4 times the inflation rate over that same period.  Today, the median home price is around $460,000.  No doubt, during the Baby Boomer's life, the US Economy boomed, and innovation exploded, making the US a superpower.  Contrast that with the most recent generations, the Xers and Millennials, they have had to contend with the Dot.com bust, the Great Financial Crisis, and Covid.  To make things worse is the backdrop of the rising cost of education, inflation, and global competition.  But like almost everything, from the seeds of crisis, the gargantuan trees of progress grow, and great jumps in innovation and technology and largely a rise in prosperity are achieved.

I remind all that the iPhone launched in 2007, YouTube in 2005, and Facebook in 2004.  If you haven't been watching the news, these three names aren't even on the cutting edge of "today's" new tech, which is artificial intelligence, commonly known as AI

We haven't even mentioned blockchain, Tesla, and quantum computing…
But back to the greatest wealth transfer in modern history. The real question is what that will mean for us as investment professionals, which may not be that interesting compared to what it will mean for the next generation.

With money comes responsibility.  We won't examine what responsibility means to Gen X and Millennials, but we can highlight some issues.

There will be rising healthcare costs for the Baby Boomers, which will undoubtedly eat away at that wealth transfer number.  Even now, healthcare costs are forecasted to rise over 100% over the next 20 years if the last 20 were a predictor. It will mean more jobs and more responsibility to care for the Boomers.  It is an opportunity for the next generations, but unfortunately, there aren't enough people in the next generations, given their smaller size.  Maybe the solution is in AI and robotics, Elon Musk seems to think so. It may also be that returns on investments are harder to come by as potential asset returns are harder to come by in the future. Undoubtedly, US and state taxes must go up given the current fiscal situation faced by our federal and state governments; higher taxes mean lower net returns.  Worse is the negative effect on economic growth that higher taxes have, as posited by Art Laffer, creator of the Laffer Curve.

That said, given the massive size of this transfer and the potential for that capital to move through the system "with fresh eyes," one can't wonder with optimism for the Gen Xers and Millennials as the Boomers "push" one last time. Imagine the opportunities! I write this as the son of Boomer parents, but as the last Boomer (1964) of a generation, there isn't a better investment we can make than an investment in people, our young people.

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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