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Stocks Lower; GDP, PCE Data This Week

°¿±¹±ð°ù±¹¾±±ð·É:ÌýMajor stock indices around the world fell last week as the S&P 500 index was lower by 2.0%, recording its worst week since April. International stocks followed suit, with international developed stocks (MSCI EAFE) and emerging markets (MSCI EM) falling by 2.4% and 3.0%, respectively, for the week. The outperformers over the past week were small-cap stocks, with the Russell 2000 index finishing the week 1.7% higher. Investors have been rotating out of big technology leaders of the market rally into rate-sensitive stocks such as small cap stocks that stand to benefit as interest rates fall. The small cap Russell 2000 index is now up nearly 7% for the month of July and has recovered from a slow start to the year. In the bond markets, yields rose modestly across the curve, as core retail sales rose by the most in three months, supporting ongoing resilience in consumer spending. The 2-year and 10-year Treasury notes closed the week at 4.51% and 4.24%, respectively, as markets now are pricing in a near certainly of the Federal Reserve cutting interest rates at its September meeting. This week, markets will be keeping an eye on political developments after President Biden dropped out of the presidential race and endorsed Vice President Kamala Harris as the Democratic nominee. On the data front, the first reading of second-quarter gross domestic product (GDP) will be released on Thursday, with a consensus expectation of 1.8% growth for the quarter. On Friday, the personal consumption expenditures (PCE) data will be reported. This is the Fed’s preferred measure of inflation, and an important metric to monitor on the continued path of disinflation. Both headline and core PCE are expected to fall to 2.5% in June, from 2.6% in the previous month. 

Update on Private Equity (from JP Morgan): Like 2022, 2023 was a stagnant year for private equity (PE). Against a backdrop of higher interest rates and economic uncertainty, PE exit activity slowed as buyers and sellers struggled to find common ground on valuations. However, recent data suggest the worst of the exit activity slump may be behind us. According to data and estimates from PitchBook, the dollar value of U.S. PE exits rose roughly 15% y/y in 1H24. This is, in part, due to a rebound in IPO exits, which likely owes to a buoyant public equity market and improved clarity on the outlook for interest rates and the economy. That said, the asset class is not out of the woods quite yet. Exits remain far below 2021 levels as public listings remain notably subdued. Corporate and sponsor acquisitions also have fallen, but to a lesser extent, and corporate acquisitions now make up a larger share of exits than normal. Moreover, the number of deals in 1H24, including estimates, rose just 1.3% y/y, while the ratio of PE exits to investments fell to 0.36x in 2Q24 as managers remain focused on putting a near-record $3.9tn of dry powder to work. For public markets, even small improvements in PE exit activity should benefit financials by way of more robust capital market activity. This already is playing out in the 2Q earnings season, with many large banks beating earnings expectations thanks to surging investment banking revenues. However, with interest rates likely to fall slowly rather than drop precipitously, exit activity may take longer to return to normal. As such, opportunities in secondaries, which can provide existing limited partners with liquidity and prospective buyers the chance to invest in seasoned assets at a discount, look increasingly attractive.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s , Bloomberg, Factset, CNBC.

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