Investment Review & Outlook – April 2024

Key Takeaways

• US economic growth has proved remarkably resilient during the first quarter of the year, primarily due to low unemployment giving consumers the confidence to keep spending.
• The strength in the economy has moderated the decline in the inflation rate, keeping the Fed on hold so far this year, and dampening investor expectations for a meaningful number of rate cuts in 2024.
• The equity market rally has broadened somewhat beyond the narrow advance of 2023, with positive stock performance from more sectors and companies than had been the case recently. High interest rates have provided bond investors with attractive income opportunities.

There is no guarantee that forecasts or estimates discussed herein will materialize, or that trends discussed herein will continue.

THE LABOR FORCE PARTICIPATION RATE FOR THOSE 25-TO-54 IS 83.5%, BACK TO LEVELS WE HAVE NOT SEEN SINCE THE EARLY 2000S, WHICH IS A VERY ENCOURAGING SIGN.

Wage Growth & Consumer Spending

Wage growth remains robust, and so does productivity. As a result, unit labor costs are not increasing, which helps dampen inflation. However, this benefit tends to be offset somewhat by minimum wage increases occurring in 50% of the US states.

Retail sales also are an important economic indicator in the consumer-driven US economy. While January retail sales declined 1.1%, they bounced back a bit in February. Consumer sentiment has been steady since January, registering at 76.5 for the preliminary March estimate, which is almost 25% above the November 2023 reading. One concern is that much of consumer spending is paid for with credit cards. Despite low unemployment, US delinquency rates on credit cards and auto loans are the highest in more than a decade. Normally, delinquencies do not start to rise until unemployment does. Current high interest rates make it difficult for borrowers to pay down their balances, an issue that will become even more significant if unemployment spikes.

Inflation – Still Higher than 2%

As of the end of February, the inflation rate was 3.2% year-over-year. Our long-term outlook for inflation is higher than the Fed target of 2%, for the following reasons:

• The labor force remains constrained due to demographic dynamics, immigration issues, and a mismatch of available labor skills versus job requirements.
• Heightened geopolitical risk, increased regulations, and potential import tariffs are inflationary factors, as the resultant increase in the cost of goods is passed on to the consumer.
• The housing market, a key driver of inflation, continues to suffer from a lack of inventory. Baby Boomers account for nearly 38% of homeowners nationwide but represent only 21% of the population. This housing shortfall will last until inventory improves, keeping home prices quite high. In combination with higher mortgage rates, this makes homeownership unattainable for many buyers.

However, we believe inflation below 3%, as well as increased productivity from advancements in automation, robotics, and artificial intelligence, provides a positive environment for growth in the economy and in the equity markets nonetheless.

Are There Rate Cuts Ahead?

Interest rates may have peaked, but we do not see them falling as quickly as investors anticipated at the start of the year. We anticipate 2 to 3 Fed rate cuts in 2024, starting in the middle to latter half of the year, depending upon ongoing inflation moderation that trends closer to the Fed’s target rate.

After its recent FOMC (Federal Open Market Committee) meeting in March the Fed stated:

“In support of its goals, the Committee decided to maintain
the target range for the federal funds rate at 5.25 to 5.50 percent.
In considering any adjustments to the target range for the federal funds rate,
the Committee will carefully assess incoming data, the evolving outlook, and
the balance of risks. The Committee does not expect it will be appropriate
to reduce the target range until it has gained greater confidence
that inflation is moving sustainably toward 2 percent.”

-FOMC Press Release 3/20/24.

Fed Chairman Powell said that it was too soon to say whether the recent trajectory of lower inflation had stalled or reversed, and that more data would be needed before confirming rate cuts are warranted. However, Fed officials have maintained their projection that they will lower the federal funds rate by three-quarters of a percentage point to a range of 4.5% to 4.75% by year-end.

Election Year & Geopolitical Uncertainties

Both domestic politics and geopolitical dynamics have the potential to disrupt the US economy and markets this year. In a US presidential election year, rhetoric from both parties will ramp up, with the potential for markets to react to headline risk in this increasingly polarized political landscape. However, based on historical data going back 56 years, the stock market tends to rise in presidential election years by 7.6%, on average.

 

Geopolitical dynamics, including the wars in Ukraine and the Middle East, add to the level of uncertainty globally. In addition to the heightened risk to the people and places in these areas of conflict, a rise in geopolitical tension tends to be inflationary as it impacts trade, shipping costs, the prices of key natural resources, and results in less economic and political cooperation among major nations.