2024 Midyear Outlook
In the second half of 2024, we can expect to see the economy slow down slightly. Economic growth has continued to surprise on the upside, and a definitive slowdown has proven elusive despite the late-cycle characteristics. However, despite initial buoyancy, economic data has begun to show signs of deterioration, leading us to anticipate an economic downshift starting in the latter half of 2024. Investors should be prepared for:
- Slower Consumer Spending
- Softer Labor Market
- A Measured Slowdown
- Contained Inflation
- Shifting Federal Reserve Policy
The stock market enjoyed a strong first half, fueled by the anticipation of looser Fed policy and strong corporate earnings growth. Looking ahead:
- Earnings Growth Will Be Key: The extent of stock market gains in the second half could be influenced by corporate profits continuing to exceed expectations.
- Valuations Are a Potential Headwind: Elevated valuations suggest most good news is already priced in and gains could be modest.
- Volatility Expected: The move higher in stocks has been very steady. However, market corrections and pullbacks are a normal part of the cycle and should be anticipated, particularly as we get closer to the U.S. presidential election.
- Be Patient: Consider a wait-and-see approach to add to equity exposure, potentially buying during market dips.
Rate Sensitivity and Spending:
More consumers without mortgages and with lower interest rates makes the economy less interest rate sensitive. Notably, the Federal Housing Finance Agency revealed that roughly half of all mortgages have an interest rate below 4%. Billions of dollars in tapped home equity spurred spending, which has caused some of the delays on rate cuts.
The surprisingly strong economy, fueled by high-income consumer spending and uneven interest rate sensitivity, is finally showing signs of stalling out. Expect slower spending, a softening labor market, and the beginnings of a measured economic slowdown in the latter half of 2024. While inflation may take some time to fully ease, the Fed will likely have room to cut rates before the end of the year as the weakening economic picture becomes more apparent.
The economy will likely downshift in the latter half of 2024, as consumer spending slows from the breakneck speed of 2023. Some weakening in the labor market is expected to contribute to the economic downshift as well. The quits rate (the percentage of employees voluntarily leaving their jobs) fell as workers have become less inclined to switch jobs and the average workweek for private payrolls has declined, suggesting weaker labor demand. The unemployment rate will stay historically low but should inch up in the second half of the year. The slowing demand for labor will eventually ease inflation pressures, giving the Fed some leeway to cut rates later this year.
Historical Pauses:
For additional perspective on where stocks may be headed, we can use the monetary policy cycle. The Fed is currently in a pause, defined by the time period between the last rate hike of a cycle and the first rate cut of the next cycle. The S&P 500 has risen during five of the six pauses in modern market history, with an average gain of 14.5%. Since the current pause began, after the Fed last raised rates on July 26, 2023, the S&P 500 has gained 20.5%. Contrary to the above scenario, if this monetary cycle is comparable to those in the past – and we generally think it is — then stocks may struggle to add much, if any, to first-half gains over the next several months.
Presidential Election and Volatility:
The 2024 election is shaping up to be extremely close, with polls showing a virtual tie and key swing states likely to determine the outcome on election night. As the candidates have starkly different positions on many major issues, it is likely to be another divisive and contentious affair. Given the historical patterns and the fact that markets usually dislike extreme uncertainty, investors should be prepared for higher levels of market volatility in the back half of the year.
Stocks soared in the first half of 2024, thanks to a surprisingly resilient economy and the anticipation of looser policy from the Fed. Meanwhile, the AI-fueled technology rally certainly gave the major indexes a boost. However, a lot of the good news may already be priced in. Valuations are high, and future equity market gains will rely heavily on earnings growth continuing to positively surprise against a backdrop of much loftier expectations. While incremental gains are certainly possible in the second half, volatility is likely to pick up. Investors should be prepared for potential setbacks, especially considering the upcoming presidential election and the heightened geopolitical situation. As such, our year-end target range for the S&P 500 remains 4,850 to 4,950. For those looking to add to equity exposure, chasing should be avoided and a buy-on-dips approach is favored.
The focus for fixed income investors should shift back to the traditional benefit of bonds: income generation. Current high starting yields offer attractive risk-adjusted returns, even without significant price appreciation. Additionally, bonds can help reduce overall portfolio volatility compared to stocks. With the Fed likely to begin cutting rates in the second half of 2024, investors should consider using bonds to replace some cash holdings. By moving into high quality fixed income, investors can lock in these attractive yields for longer and fortify their overall portfolios
Industrial commodities are surging due to resurgent manufacturing in China and the U.S., particularly in the EV sector. Strong demand for EV production and the AI infrastructure buildout are driving prices higher. This trend is expected to continue in the second half of 2024, but likely at a more moderate pace if the economy begins to slow. Meanwhile, the geopolitical and political uncertainty we have discussed could maintain demand for precious metals.
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