Second Quarter 2024 Update

August 1, 2024

Key Points

• The US economy’s growth rate continued to slow in the first quarter of 2024 after having posted multiple quarters of above-trend growth. Despite the moderation in growth economists have been impressed with the overall economy’s performance.
• Stock prices were on balance higher for the third consecutive quarter. Unlike previous quarters, however, gains were relatively concentrated in a few economic sectors.
• The FOMC at its latest meeting signaled that it would maintain its current federal funds rate target range of 5.25%-5.50%, as the data show that inflation has stabilized and shown signs of improvement, but at levels that are still higher than the target of 2% and which still warrant attention.

2cd QUARTER 2024 MARKET COMMENTARY

Below, we’ve highlighted 2024 broad market returns for the current quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy’s growth rate slowed somewhat in the fourth quarter of 2023 compared to the unsustainable pace of the prior quarter, but economists remain encouraged by the ability of the economy to perform well for so long. The economy’s above-trend growth rate resiliency continues to surprise analysts, who caution that heightened interest rates and still elevated inflation will eventually mean that consumers will increase their savings rate and growth will slow. The February employment report showed that employers added 275,000 jobs in the month, but that the unemployment rate was slightly higher at 3.9%. The Federal Open Market Committee (FOMC) maintained its federal funds rate target range at 5.25% to 5.50% as inflation data has stabilized at levels that are still above target, but which is expected to show improvement.

EQUITIES

Stock prices were on balance higher for the third consecutive quarter. Unlike previous quarters, however, gains were relatively concentrated in a few economic sectors. Stock investors have bid prices higher based on continued strength in the labor market, an expectation that inflation is stabilizing, and the overall economy’s impressive resilience. After a brief dip early in the quarter, stocks reversed course and marched steadily higher, closing out the quarter near its highest point. When the quarter ended, the S&P 500 Index had advanced 4.3%.  Small cap stocks, as represented by the Russell 2000 Index, underperformed large caps and finished the quarter with a total return of -3.3%.  International stocks generated mixed results during the quarter, and generally fell short of the performance of US equities.  The MSCI EAFE Index of developed markets stocks was lower by 0.4% and the MSCI Emerging Markets Index advanced by 5.0%.

FIXED INCOME

The FOMC at its latest meeting signaled that it would maintain its current federal funds rate target range of 5.25%-5.50%, as the data show that inflation has stabilized and shown signs of improvement, but at levels that are still higher than the target of 2% and which still warrant attention. Policymakers have adopted a wait-and-see approach, requiring a prolonged pattern of reduced inflation before considering policy adjustments

Fixed income securities’ prices were moderately higher (and yields lower) during the quarter, as the bond market firmed on expectations that inflation has begun to stabilize and will trend toward the FOMC’s 2% target level enough for the committee to begin lowering rates in the near future. The bond market was encouraged by May’s inflation data which showed a year-over-year Consumer Price Index (CPI) rise of 3.3% for May 2024.

SUMMARY

The outlook for the economy this year appears promising. Consumers are contributing actively by spending sufficiently to bolster broader economic expansion. Real incomes, and consequently consumers’ purchasing ability, are improving thanks to a robust job market. Moreover, substantial excess savings accumulated during the pandemic by middle- and higher-income households persist in supporting spending, providing consumers with disposable income as their wealth increases. The US economy remains robust, even though growth has slowed somewhat, with real GDP expected to increase by approximately 1.5% annualized in the first half of this year, down from 2.5% last year. This deceleration is seen positively as the Federal Reserve aims to stabilize the job market and curb inflation. Unemployment remains low at 4% but has risen by 0.5 percentage points in the past year, accompanied by a softening in hiring and decreases in hours worked and temporary employment—key indicators of future job growth. Pressures on wages and inflation are easing, and the Fed’s target of 2% inflation appears achievable. However, many economists and analysts are of the opinion that as growth decelerates and unemployment edges upwards, the economy appears more delicate and exposed to risks. Numerous factors could disrupt the current trajectory, including geopolitical tensions that may escalate and the potential for significant downturns in the stock and bond markets, which are currently at elevated valuations. One of the prominent concerns among analysts is that there will be a misstep in Federal Reserve policy. In addition, market participants are now paying closer attention to election polls to handicap the outcome in November’s elections. Globally, despite aggressive monetary policy tightening over the past two years, economic growth has proven more resilient than anticipated. The previous year was overshadowed by persistent fears of a global recession, but with inflation cooling and the prospect of interest rate cuts on the horizon, households and businesses in most developed economies seem reassured that conditions are on the mend. Overall, while economists and analysts are generally positive on the economic outlook, investors should be diligent in monitoring diversification in their portfolio as the election cycle begins to heat up.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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