The Fed held the line on interest rate hikes since July 2023, and has indicated that rate cuts may begin soon. Yet annual inflation has proved stubborn, remaining above the 3% level for 12 consecutive months. “While the Fed initially projected three, 2024 rate cuts,4 it appears more likely that we may see only one or two,” says Haworth. The timing of the start of Fed rate cuts seems far from certain.
Can the economy stay on track?
Has the Fed managed to achieve what’s referred to as a “soft landing” for the economy, staving off a recession while beating back inflation? The latest data makes it less clear if the economy can maintain its momentum or if the inflation risk is yet fully in check. However, the Fed’s own projection calls for GDP growth of 2.1% this year, slower than in 2023 but an indication that the pace of economic growth is expected to accelerate during the year.
“Modest, steady economic activity is the path we appear to be on at this point, and there don’t seem to be signs of serious recession risk,” says Haworth. “Nevertheless, a big question that may drive the markets and the timing of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing.”
To this point, consumers have held their ground. “Inflation remains somewhat elevated, meaning there is still demand from consumers,” says Haworth. However, there may be ongoing pressures “What surveys are telling us is that price levels are challenging for some consumers, and on top of that, borrowing is expensive as well,” says Haworth. “While that may ultimately impact consumer spending levels, we’re not seeing it yet.”
Stubbornly high interest rate complicate matters for businesses as well, particularly as it relates to business capital investment. “If rates stay elevated or move higher and companies are forced to issue debt with more significant financing costs, that could dampen business activity and threaten current expectations for economic growth,” according to Haworth.
Implications for investors
Notably, says Haworth, “GDP is not a primary economic indicator for professional investors. Other data points arrive on a timelier basis that signal the degree to which economic expectations are on track.” However, GDP is ultimately the measure that indicates the overall health of the U.S. economy, which has an impact on the markets.
Equity markets continue a rally that began in October 2022, with the benchmark S&P 500 rising more than 15% in 2024’s first six months, following 2023’s 26% gain.5 All major market indices such as the S&P 500 Index, the Dow Jones Industrial Average and the NASDAQ Composite Index, surpassed previous all-time highs, achieved prior to 2022’s bear market.6 As was the case in 2023, a narrow group of stocks, primarily in the technology sector, have led the markets this year. However, other sectors are playing a bigger role in the market’s positive results this year compared to 2023. Haworth says the combination of ongoing economic growth and persistent inflation make stocks more attractive relative to bonds. Haworth adds if the economy manages to demonstrate ongoing strength in the coming months, that could work to benefit non-technology sectors of the market that are more dependent on favorable economic trends. For example, utility stocks year-to-date, which struggled in 2023, represent one of the top performing sectors within the S&P 500 in 2024.5
Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet the challenges of what continues to be a dynamic market and economic environment.
Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.