Still Waiting for the Turn
Expanding on our initial 2024 Outlook, “A Turning Point,” this midyear update offers fresh insights into the economic and market landscape, along with their potential impact on investment portfolios.
THE ECONOMY: A TALE OF PROLONGED RESILIENCE, BUT A DELAYED LANDING ON THE HORIZON
Economic growth has continued to surprise on the upside, and a definitive slowdown has proven elusive despite the late-cycle characteristics. This economic resilience can largely be attributed to the following:
§ Surprising Spending Strength: Consumers, particularly wealthier ones, surprised us with their continued spending power despite high prices.
§ Varying Degrees of Interest Rate Sensitivity Across the Economy: The refinancing boom experienced during the COVID-19 pandemic has boosted disposable income and further amplified the economy’s resilience. 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: Consumers are shifting away from bigticket purchases, likely leading to broader spending slowdowns.
§ Softer Labor Market: Recent data indicates labor demand is weakening. The unemployment rate, though historically low, is expected to rise in the last two quarters of the year.
§ A Measured Slowdown: As consumer spending and labor demand slow, a moderate economic slowdown should follow.
§ Contained Inflation: Core services inflation is expected to cool as labor costs decelerate, but the overall impact on consumer prices will take time.
§ Shifting Federal Reserve Policy: A higher unemployment rate, weaker growth, and contained inflation will eventually provide the Federal Reserve (Fed) with a path to cut rates before the end of the year.
THE BOND MARKET: FIXED INCOME'S NEW REALITY
Sharp shifts in interest rate expectations have been a hallmark of the bond market over the last few years, but with volatility comes opportunity, and investors should consider:
§ Current Bond Yield Levels Offer Opportunity: Treasury yields are near their highest levels in decades, making fixed income an attractive asset class again. Investors can build diversified portfolios with high-quality bonds offering attractive returns.
§ Focus on Income: With rate cuts likely, a focus on income generation becomes more important for fixed income investors than price appreciation. Consider fixed income over cash.
§ Don't Expect Big Moves in Longer-Term Yields: An inverted yield curve suggests limited potential for significant declines in longerterm bond yields.
THE STOCK MARKET: EARNINGS, VALUATIONS, AND VOLATILITY IN FOCUS
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.
THE BOTTOM LINE
§ Economy at a Crossroads: The global economy is in a late-cycle transition, characterized by slowing growth and potential for increased volatility. This creates a complex environment for investors, requiring a more nuanced approach.
§ Volatility on the Horizon: Expect increased market fluctuations across assets in the latter half of 2024. This could be driven by factors like central bank policy changes, geopolitical tensions, and election uncertainty.
§ On Bonds and Cash: The increase in yields has made fixed income an attractive option again. Focus on income generation. Investors can best navigate the late-cycle economic environment by adding high-quality bonds, offering attractive risk-adjusted returns, and lower overall portfolio volatility. Consider moving away from cash, with the Fed likely to cut rates in the second half.
§ On Stocks: Maintain a disciplined and more patient approach towards equities. Prioritize risk management and look to capitalize on buying opportunities during potential market corrections.
§ Overall: Stay informed and actively monitor market developments. Be prepared to adjust tactical portfolio allocations based on changing economic and market conditions.
