● After a stronger than expected 2023, real GDP growth slowed to 1.4% in 1Q24. Although economists are no longer calling for
a recession, growth rates are being revised down with the Federal Open Market Committee now expecting real GDP growth of
2.1% for 2024 and 2.0% in 2025, down from 3.4% in 2023.

● The unemployment rate has moved up to 4.1% from 3.8% in three months as jobless claims continue to move slightly higher
and above expectations. This is partly due to private nonfarm payrolls coming in lower than expected in two of the last three
months indicating the job losses are in the private sector with limited impact among public employees.

● After stalling for several months, inflation is coming down, albeit slowly. The core CPI (ex food and energy) for May was up
3.4% YoY in May, down from 3.8% YoY in February. While we expect further progress on inflation for the next 18 months, we
don’t believe the Federal reserve will be able to bring inflation down to its goal of 2.0% absent a recession. As nearly 70% of
the US economy is driven by services and services are labor intensive, higher wage growth (hourly earnings up 3.9%YoY in
June and 4.1% in May) will flow into higher prices keeping inflation elevated in the near term.

● The S&P 500 had another good quarter in 2Q24, increasing 3.9% led by Technology and Communications as the leading
companies in these two sectors delivered strong revenues and earnings growth and continued to benefit from AI expectations.

● The 10-year Treasury bond yield increased by 17 bps during the quarter to reach 4.37% leading to further pressure on bond
prices. The Aggregate US Bond Index declined 0.9% in 2Q24.

● We favor investment grade intermediate term bonds. We recommend investors to stay away from long-maturity bonds since
continued large US deficits will force the yields on long-term US bonds to stay high, preventing price appreciation and risking
price declines.

● We recommend bond ladders of IG Intermediate bonds with attractive yields and the potential for price appreciation in the next
2-3 years.

● Short term interest rates continue to remain at attractive levels, but have reinvestment risks over the next 12-24 months as the
FED lowers interest rates by 150-250 bps, starting in 2H24.

● Studies show that market timing typically produces inferior returns. We encourage diversification and a focus on working
towards financial planning goals.

• Geopolitical unrest and the risks to global growth:
  • Global unrest continues as Russia pursues attacks on Ukraine, Israel proceeds in its war against Hamas in Gaza, the Houties carry on attacking shipping in the Red Sea, and Hezbollah’s rocket attacks on Northern Israel risks a conflict between Israel and Lebanon, potentially involving Iran and Syria.
  • Cold War 2.0 has started with Russia, China, and Iran on one side and the West and allies on the other side. The delineations are less clear than in the past, but this will have negative consequences for trade, globalization and economic growth as resources are allocated away from consumers to defense.
  • The political wind in the west is changing as ruling party coalitions are losing support among populations and Biden’s poor debate performance has led to calls for him to step down as the Democratic’s presidential nominee.
    
    
• Economic growth, unemployment, and FED action:
  • Despite slowing, the US economy continues to expand and add jobs, keeping unemployment relatively low. This is positive for consumer spending but keeps pressure on inflation. The FED has signaled their plan to reduce interest rates, but we expect them to be cautious and slow to ensure inflation really comes down.
  • The corporate sector remains strong as earnings continue to come in better than expected. The EPS for the S&P 500 are now projected to grow 9.0% in 2024 and a further 13.1% in 2025. As companies continue to hire more workers, it should propel the economy higher.
    
    
• US Government budget deficits:
  • The US continues to run large budget deficits with fiscal 2024 now projected at minus ~$2.0 Trillion despite a robust increase in tax revenues. With both current Presidential candidates being populists, we don’t expect any change in spending, only where the spending will go post the election.
    
    
• US Government Debt:
  • US Federal debt-to-GDP has risen to 122% versus 58% in 2000. The Congressional Budget Office (CBO) projects US Federal debt to rise by ~$20 trillion in the next decade even in the most positive scenario to ~$55 trillion.
  • Continued large budget deficits will make this worse and eventually force harsher changes when the music stops.
  • Interest payments on the Federal debt held by the public rose 43% YoY in the first six months of fiscal 2024 to ~$440 billion, exceeding defense spending of $412 billion for the same period.
  • As the interest on the Federal debt will consume a higher, and higher percentage of the government’s budget, it will crowd out other spending, making it harder to make changes the longer we wait.
  • Increasing debt from low debt levels is not a problem. It becomes an issue when debt levels are so high adding more debt and refinancing existing debt becomes problematic.
    
    
• FED action and Capital Markets:
  • Higher interest rates increase the cost of capital for all companies. This means fewer projects get approved, ceteris paribus, and by extension lower future growth.
  • The risk of bankruptcy for highly indebted companies increases as interest costs rise faster than revenues.
  • Ultimately, higher interest rates are negative for both the stock and bond markets. The higher rates lead to a higher discount rate for future growth, that also is lower, leading to lower equity valuations and to lower bond prices for existing bonds so yields can be competitive with coupons on newly issued bonds.
    
    
• Emerging market growth and China’s real estate bubble:
  • China’s economic growth is slowing as spending on infrastructure projects is decelerating. An oversupply of apartments has caused prices to decline and left an overhang of bad debt from large real estate developers putting a brake on new construction. Since real estate and infrastructure spending have been behind a large portion of China’s growth, this will hurt economic growth going forward. This is compounded by China’s population peaking and wages becoming less competitive.
  • Companies are moving production away from China with India being a big beneficiary as the country’s economic growth has surpassed China.
  • Higher demand for key raw materials used in the energy transition will benefit select EM economies such as Brazil and Indonesia that have these resources.
    
    
• Economic growth, corporate earnings, and financial markets:
  • Putting it all together, we expect continued US economic growth, but at roughly half the rate in 2023. This should propel US corporate earnings higher by~10% this year. We favor intermediate IG corporate bonds due to a combination of strong balance sheets and attractive yields. We recommend long-term investors to stay invested despite darker clouds such as higher geopolitical risks, a slowing China, and a recognition large US budget deficits and higher Federal debt will increase risks over time. We will eventually have a correction, but the timing is unpredictable. Importantly, the equity markets have moved to new highs following corrections, rewarding patient investors, including investors in the last 18 months.