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Five In Five

July 2024

Five in Five is a monthly publication where we share graphs around five topics that illustrate the current state of the markets, with brief commentary that can be absorbed in five minutes or less.

This month's topics include:

  1. Inflation Expectations
  2. Once Bitten, Twice Shy
  3. MBS Securities Offer Best Value
  4. S&P 500 – Equal Weighted Index Underperforming
  5. Large Cap Growth Dominates in June


PCE %YOY Graph
Source: Bloomberg

  • The Personal Consumption Expenditures (PCE) price index is the Federal Reserve’s (Fed) preferred inflation gauge as it accounts for shifts in consumer behavior, such as when shoppers will substitute less-expensive items for pricier ones.
  • The 5-Year, 5-Year Forward Inflation Expectation Rate is a measure of the expected rate of inflation for the five-year period beginning five years into the future.
  • Inflation continues to decline at a modest pace which has slowed due to continued strength in the pricing of services.
  • Longer-term outlook sees a modest level of inflation.
  • Both measures point toward an inflation environment that is moving closer to the Fed’s stated goal of 2%.


Two-year Treasury Yield Graph
Source: BTC Capital Management, Bloomberg

  • Two-year Treasury yields suggest the bond market is too focused on inflation and reluctant to react to growth data.
  • The Fed has repeatedly noted that they would react to a growth slowdown, which is picking up speed.
  • The Citigroup Economic Surprise Index (CESI) is at a two-year low, GDP Nowcasts have fallen from 4% toward 1.5%, and Purchasing Managers’ Index (PMI) data is weak.
  • July has a 5% chance of a Fed Funds rate cut and September remains less than 100%.
  • It seems possible that upcoming Fed chatter will note growth weakness and pull forward rate cut odds.


MBS & Corporate Spreads Graph
Source: BTC Capital Management, Bloomberg

  • Mortgage-Backed Securities (MBS) spreads versus Treasuries (orange line) remain near previous crisis levels.
  • Corporate bond spreads (blue line) remain near historical tight levels.
  • The ratio between MBS spreads and corporate bond spreads is the widest it has been in more than 10 years.
  • Corporate bonds are more volatile and prone to much larger drawdowns.
  • The strategies continue to favor MBS.


S&P 500 - Equal Weighted Index Underperforming Graph
Source: BTC Capital Management, FactSet

  • The table above displays the average Next Twelve Months (NTM) P/E of stocks in the S&P 500 sorted by market cap size within deciles.
  • When comparing companies that are relatively smaller in the S&P 500 to the large and mega-cap stocks, it is evident that the larger cap stocks are trading at a higher P/E multiple.
  • Investors continue to migrate to the large and mega-cap stocks that are providing superior forecasted earnings growth and have thus far been able to deliver on lofty expectations.


Large Cap Growth Data Table
Source: Bureau of Labor Statistics

  • While a number of headline equity indices continued their upward momentum during June, not all stocks participated in the rally.
  • The only style/size constituents that had positive returns in June were large cap Growth and large cap Core.
  • No other style/size constituent exhibited positive gains for June. Interestingly, mid and small cap growth saw negative returns for the month, indicating the market is not experiencing an overall growth rally, but specifically a large cap (mega cap, to be more precise) growth rally.

Investment products and services may lose value, are not a deposit, are not guaranteed by any financial institution, and are not FDIC insured or insured by any government agency.

Source: BTC Capital Management, U.S. Bureau of Labor Statistics, Bloomberg Finance L.P., Bureau of Economic Analysis, S&P Corelogic, National Association of Realtors. The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized. This document is intended for informational purposes only and is not an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.


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