Despite strong gains in the equity markets, economic growth slowed in Q1 2024.

Potential factors include change in consumer behavior, continued inflationary concerns, and uncertainty with the upcoming election.

Market Recap

Equity markets have continued to show strength so far this year. U.S. large cap companies, as measured by the S&P 500, are up 15.3% through June 30th. Almost all of the S&P 500 sectors are positive on the year, led by Information Technology (+28.2%), Communication Services (+26.7%), and Energy (+10.9%).

The international stock index (MSCI ACWI ex U.S.) is lagging behind U.S. stock performance. However, it is still positive for the year, up 5.7%.

The core bond market has struggled comparatively over the first half of the year as bond investors saw stubbornly higher interest rates at a time when they expected rate cuts sooner. The Bloomberg US Aggregate Bond Index is down 0.7% through June 30th.

Let’s dig into the U.S. economy, consumer spending behavior change, election year considerations, and market performance.

The Economy

First-quarter 2024 saw slower-than-expected GDP growth influenced by reduced consumer spending and the strong job market. Despite inflation remaining above target, it is expected to moderate.

Last quarter, we stated that we expected GDP growth to slow in 2024 compared to the growth we saw in 2023. We didn’t expect growth to slow as much as it did in the first quarter. First-quarter real GDP increased only at an annual rate of 1.4%, the slowest pace since the second quarter of 2022. A significant reason for the slowdown was a decrease in consumer spending on both goods and services. The U.S. consumer makes up nearly 70% of the U.S. economy, so any slowdown is a cause for concern.

Changes in Consumer Behavior.

The usage of consumer credit continues to rise. It crossed the $1 trillion mark for the first time nearly a year ago and currently sits at $1.06 trillion. Fortunately, while it continues to rise, it is doing so at a slower pace. Last May, it had risen more than 14% over the previous year, while this May, it only rose by 7.3%. Meanwhile, the personal savings rate for Americans was 3.9% in May, much lower than the historical average of 7%. The rising debt level and higher interest rates point to a U.S. consumer that may continue to struggle.

Fortunately, inflation has begun to moderate once again after remaining unexpectedly high during the first quarter. Core PCE inflation (which removes the effects of food and energy prices and is the Fed’s preferred inflation measure) has fallen to 2.6%. Still, it remains higher than the 2% target. Inflation decelerated in May, but we expect it to hover around 2.5% over the next several months.

The jobs market in the U.S. remains strong overall, but we expect it to moderate over the coming months. Non-farm payrolls have remained above the pre-pandemic hiring rate. However, the unemployment rate increased to 4.1% (vs. 3.96% prior). This was above consensus expectations but still below the long-term average, and we expect it to remain between 4% to 4.1% through the end of the year.

The Fed

Grappling with steady inflation and a cooling job market, the Fed is maintaining current interest rates. Expectations of potential rate cuts deferred into late 2024 pending updated economic indicators.

The Federal Reserve System in the U.S. faces a dual mandate – keeping inflation near its 2% target, and maintaining full employment. As we mentioned, inflation is higher than its target, and the job market remains healthy overall but has started cooling.

The expectation coming into the year was that the Fed would reduce interest rates sometime in the late first quarter or early second quarter. However, because inflation has remained stubbornly high, the expectations continue to be pushed back. The members of the Federal Open Market Committee (“FOMC”) believe interest rates need to stay higher for longer to bring inflation back to the 2% target. As we mentioned earlier, we are seeing the effects of the higher rates with the U.S. consumer that is starting to slow its spending.

We expect to see cuts between 0.25 and 0.5% through the end of this year, with the first cut likely occurring later in the third quarter during the September Fed meeting. Of course, if inflation proves to be persistent and the jobs market unexpectedly strengthens, the expectations for the first rate cut may be pushed out even further.

Eyes Toward November Election

The election, likely featuring a rematch between Biden and Trump, could have a variety of implications in potential policy changes. Historically, election years result in slightly heightened market volatility.

The election may cause more market volatility, especially as uncertainty about the outcome grows. It will likely be a repeat of 2020, featuring a rematch between Joe Biden and Donald Trump. But as of now, there's some uncertainty about whether President Biden is up to the challenge of a rigorous campaign and four more years in office. This is especially true after a subpar performance in the first debate.

The election is less than four months away. A lot can change, mainly because Biden and Trump are 81 and 78 years old, respectively.

From a policy perspective, the two candidates have a lot on the table. They have different views on wealth inequality, climate change, abortion rights, inflation reduction, immigration (especially at the southern border), international trade, and tariffs.

Also at play in the election is what each administration will do with taxes. The Trump tax cuts are set to expire at the end of 2025. A Trump presidency will likely see an extension of the tax cuts. A Biden reelection could lead to tax increases for those earning more than $400,000.

It's hard to say how the market will respond both up to and in the months following the election. A study by T. Rowe Price found that, in the past 96 years, S&P 500 returns were slightly lower in election years. They were 11% in Presidential Election Years versus 11.6% in other years.

However, it's important not to let politics affect your portfolio decisions. Instead, we recommend keeping a long-term view based on your investment objectives and financial plan.

In summary, mixed broader indicators suggest a tempered U.S. economic environment.

In the first half of 2024, U.S. stocks surged, driven particularly by gains in the Technology and Communication sectors. Economic growth slowed, largely credited to decreased consumer spending. While inflation may be moderated, uncertainties of the November election could impact market stability.

Want to read more about the markets and economy? Visit our Markets In Focus: What A Difference A Year Makes post with more about our economic footing for 2024, plus details on interest rates, the economy, and jobs.

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Investment advice offered through OneDigital Investment Advisors LLC. The materials and the information provided are not designed or intended to be applicable to any person's individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. Any reference to a specific company is not a recommendation to buy, sell, or hold any security. Any economic forecasts in this commentary are merely opinion, and any referenced performance data is historical. Past performance is no guarantee of future results. All investment involved risk of loss. Some information has been obtained by sources we believe to be reliable. OneDigital Investment Advisors LLC makes no representations as to the accuracy or validity of this information. Additionally, OneDigital Investment Advisors does not have any obligation to provide revised investment commentary in the event of changed circumstances. Views and Opinions expressed herein are provided as of June 30, 2024.