Persistence seems to define the current economic and market landscape.
Friday, August 2, 2024
As we’ve entered the second half of 2024, a sense of persistence defines the economic and market landscape. Trends from late 2023 have continued, with surprisingly resilient economic growth mixed with stubborn but decelerating inflation. Equity markets have thrived and regained ground from 2022. On the other hand, the bond market still grapples with policy uncertainty and remains range bound for the most part. While it’s tempting to forecast a continuation of these trends, our analysis suggests an impending shift. The economy looks poised to cool down in the second half, which will have an impact on both policy and markets. To navigate this evolving landscape, we leverage the expertise of our Strategic & Tactical Asset Allocation Committee (STAAC), which identifies potential risks and opportunities. In today’s higher-rate environment, the STAAC believes investors have more options. By prioritizing income generation and remaining patient and disciplined with equities, investors can navigate the upcoming potential uncertainty with continued success.
As Warren Buffet will tell you, "The first rule of investing is to be patient, not active, and to 'wait for the fat pitch.'"
No matter what the markets and economy throw our way, we remain committed to providing the best possible guidance. It is a privilege to be in this role, and we truly appreciate the trust and confidence you continue to place in us.
THE ECONOMY
Economic growth has continued to surprise on the upside, and a slowdown has proven elusive. This economic resilience can largely be attributed to strong consumer spending and varying degrees of interest-rate insensitivity throughout parts of the economy.
Hard and soft economic data has begun to deteriorate, and we still anticipate an economic slowdown beginning in the latter half of 2024.
That said, a delayed landing is on the horizon. Hard and soft economic data has begun to deteriorate, and we still anticipate an economic slowdown beginning in the latter half of 2024. Investors should be prepared for slower consumer spending, a softer labor market, and contained inflation – all core ingredients needed to give the Federal Reserve (Fed) an onramp to cut rates before the end of the year.
STOCKS
Stocks soared in the first half of 2024, fueled by the anticipation of looser Fed policy and a resilient economy. Looking ahead, earnings growth will be key, and the stock market will likely rely heavily on corporate profits continuing to exceed expectations. Elevated valuations are a potential headwind, suggesting that most of the good news is priced in and that gains could be modest.
While incremental gains are possible, volatility is likely to pick up. Investors should be prepared for potential setbacks, especially considering the election in November and the uncertain geopolitical situation. It’s all the more reason to consider a wait-and-see approach in adding to equity exposure, potentially buying during market dips.
BONDS
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.
U.S. ELECTION
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.
Given the historical patterns and the fact that markets usually dislike extreme uncertainty, investors should prepare for higher levels of market volatility in the back half of this year.
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.
Hold on to your proverbial hats! This election season promises to be a real doozy.
GEOPOLITICS
The rise of competing power blocs and escalating regional conflicts raises significant concerns for global stability. While diplomatic efforts have prevented a wider conflict so far, these tensions have created an environment of heightened uncertainty for investors. Markets have been less reactive to current conflicts, but this could change rapidly if hostilities escalate.
The increasingly uncertain geopolitical environment is one reason we believe investors should keep their market exposures tightly managed in the second half of the year.
COMMODITIES
Industrial commodities have strengthened due to resurgent manufacturing in China and the U.S., particularly in the electrical vehicle (EV) sector. Strong demand for EV production and 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 could maintain demand for precious metals.
CURRENCIES
The Fed’s to-date hawkish stance has kept the dollar supported and creates headwinds for other currencies, especially in emerging markets. While rate cuts could weaken the dollar down the road, near-term strength is likely to persist until inflation shows more definitive signs of moving towards target.
While rate cuts could weaken the dollar down the road, near-term strength is likely to persist until inflation shows more definitive signs of moving towards target.
ALTERNATIVE INVESTMENTS
As expected, 2024 has seen a rise in market dispersion, creating opportunities for skilled active managers in the alternatives space. Moving forward, we anticipate this trend to continue and for volatility to begin to rise more meaningfully. This environment will favor certain strategies that can capitalize on both broad economic trends and micro fundamentals. Over the intermediate and long-term, we believe incorporating alternative strategies like Global Macro, Multi-Strat, and Managed Futures could benefit investors vs. maintaining solely a traditional stock/bond allocation.
As stated at the beginning, no matter what the markets and economy throw our way, we remain committed to providing the best possible guidance. Again, we value our relationship with you and appreciate the trust you place in us!
Blessings for a great weekend and for the rest of 2024!
Jim
(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.)
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