Equities and Fixed Income: A Tale of Two Markets
The first half of 2024 has been a period of remarkable divergence between equities and fixed income. While equities performed better than expected, driven largely by the continued dominance of the Magnificent 7 stocks and the burgeoning AI sector, fixed income faced challenges. However, we maintain a positive outlook for fixed income as we move further into 2024, anticipating a turnaround bolstered by favorable economic conditions.
The Magnificent 7 and Broader Market Rally
In 2023 and the first half of 2024, the Magnificent 7 stocks were at the forefront of equity market gains, powered by advancements and investments in artificial intelligence. Looking ahead, we foresee a broader-based rally in the stock market, fueled by the Federal Reserve's anticipated rate cuts. This broadening of the rally is expected to lift a wider array of stocks, potentially leading to robust market performance in the coming year.
Economic Resilience and Recession Risks
The odds of a mild recession in 2024 have diminished significantly, thanks in large part to the resilient labor market. With 8 million job openings in the US, job creation remains strong, and unemployment rates are low. This robust job market has been instrumental in keeping the economy on stable footing.
Inflation Trends
Inflation continues to show signs of cooling. From a peak of 9.1% in June 2022, inflation has steadily declined, and we expect it to settle between 2.5% and 3% by the end of this year. Notably, June 2024 marked the first month in four years where inflation fell, a promising indicator for the economy. In 2023, inflation stood at 3.4%, highlighting a downward trend that we anticipate will persist.
Market Lows and Federal Reserve Actions
We continue to believe that October 12, 2022, marked the most likely low for the markets in this cycle. The Federal Reserve's anticipated rate cuts are expected to support both equity and fixed-income markets. While the market initially predicted as many as 6.8 rate cuts at the start of the year, current expectations are for 1-2 cuts. This monetary policy shift should benefit the markets, though we do not expect a straight-line upward trajectory.
Cash Performance and Historical Trends
As rates decline, cash investments are likely to underperform, historically favoring equity and fixed-income markets. Despite concerns about investing when markets are at all-time highs, historical data suggests that buying at market highs often yields better one-year, three-year, and five-year performance compared to other times.
Election Year Considerations
Looking ahead to 2024, an election year, historical data provides some reassurance. Market performance tends to be strong in election years, averaging 11.57% annually, compared to 10.1% in non-election years. Regardless of the election outcome, we remain confident in the market's potential for growth.
Conclusion
In summary, the first half of 2024 has brought both opportunities and challenges. While equities have outperformed expectations, fixed income has faced headwinds. However, with anticipated Federal Reserve rate cuts and a resilient labor market, we remain optimistic about the prospects for both asset classes as we progress through the year.
Stay tuned for further updates and insights as we navigate the evolving economic landscape. For more detailed insights and personalized advice, please reach out to your Provista Wealth Advisor.
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