Monthly Market and Economic Update - July 2024

Current Market and Economic Conditions

• In July, the S&P 500 Index was up 1.22%, while the Bloomberg Barclays US Aggregate Bond Index was up 2.34% and the Bloomberg Barclays Municipal Bond Index was up 0.91%.
• The stock market reacted to the improvement in the inflation numbers by beginning a rotation from high flying growth stocks (-1.3%) toward small cap stocks (+10.1%) and value stocks (+4.7%).
• Bonds also took advantage of good inflation numbers with positive price appreciation from falling interest rates.
• With inflation easing, the Federal Reserve Open Market Committee (FOMC) all but confirmed that they will reduce the Fed Funds in September.

Bond Market     

• The FOMC held rates steady at the conclusion of its meeting at the end of July but seemingly telegraphed a September rate cut, noting that the central bank is back to evaluating both sides of its dual mandate — inflation and employment. Employment has been the stalwart of the economy but is showing some cracks. The Federal Reserve has managed the ascent of interest rates without causing an economic stall. The question for investors is whether they will be able to bring rates back down while keeping the economy aloft.
• The Futures market is projecting two interest rate reductions by FOMC before the end of the year. The significant change is that the odds of a 50bps reduction in rates, in September, is now 80%. More significantly, the Futures market is showing a 75% chance of another 50bps decline between the November and December meetings.
• The job market has been the strength of the economy since the Covid-19 recovery began in 2021. While the unemployment rate has risen from 3.4% to 4.1% over the past 16 months, the Job Openings and Initial Claims for unemployment are still at historically favorable levels. The recent rise in the unemployment rate is not due to job losses. Rather, it is primarily a result of workers being drawn back into the job market, increasing the ranks of those classified as “unemployed” rather than “retired.”
• For bond investors, the combination of higher current interest rates and rising values due to falling yields may result in a rather ordinary but potentially positive year for bonds. Given the volatility in bond values over the past few years, ordinary is likely welcome. The probability of a soft landing for the economy is increasing. 2024 started with strong results for the key indicators for economic growth – jobs growth, consumer spending, and industrial production. Despite numerous recession forecasts in 2022, 2023, and now going into 2024, the actual economy continues to grow.

Stock Market

• The election year “October Surprise” happened in July this year when President Biden stepped aside and Vice President Harris all but locked up the nomination for the Democrat ticket. Typically, the first half of an election year is marked by uncertainty and market volatility. This year had been the exception as the candidates had been determined for some time…until recently. Given this uncertainty, the market may be volatile in the short run. However, given the performance year to date, the market has built in a significant cushion to absorb a short correction.
• As has been evident throughout 2024, the stock market has been much more focused on the direction of inflation, interest rates and the employment picture. The primary concern for the market right now is whether the Federal Reserve can keep the economy aloft while reducing interest rates. Growth stocks have started a correction from their overvaluations. However, small cap stocks, Value stocks and especially international and emerging market stocks are all significantly undervalued when compared to Growth stocks. The Growth stocks have been leading the market for the better part of the last two decades. Rotating out of them does not mean that their dominance is over, investors may simply be recognizing that other parts of the market may provide opportunities in a lower inflation and interest rate environment.
• The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve prescribing strong medicine in the form of higher interest rates, certain market sectors and the overall economy have endured some short-term side effects. Now that the Federal Reserve is projecting a pivot to lower interest rates in the second half of 2024, the markets are behaving as if we are in an economic recovery which should mean leadership broaden out toward stocks that have been overlooked and undervalued. Those opportunities can be found in both US and international stocks. Investors should focus on the longer-term path of the stock market and the economy and take advantage of any short-term correction by rebalancing to their appropriate risk profile.

Portfolio Management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.