After an extended period of stability in the financial markets, volatility has finally returned. The stock market experienced a prolonged rally this year until this summer when recession fears reentered the conversation among investors. Fluctuating inflation, potentially weaker employment, and interest rate changes have contributed to recent economic uncertainty.
Recent data shows that while inflation is low, other economic indicators are less positive. The extra savings people accumulated during the pandemic have mostly been spent, which means consumer spending might slow, leading to decreased economic growth later in 2024.
Job growth is also slowing, and more people are borrowing money while having less cash on hand, causing more people to fall behind on their loan payments. The job market is showing signs of weakening, with fewer jobs being added than expected, and the unemployment rate is rising. These factors suggest that people's financial situations are becoming strained, and if the Federal Reserve continues its tight monetary policies, conditions could worsen.
Midyear, we were optimistic about U.S. stocks, preferring them over bonds and cash due to steady earnings growth, a potential interest rate cuts, and reduced political uncertainty as Trump’s poll lead grew. This led to a shift in the market from large tech stocks to smaller companies and value stocks. Despite a recent 8.5% drop in the S&P 500 due to recession fears, we believe the market could recover if the broader economic and corporate fundamentals remain strong. Additionally, the presidential election cycle is unusual, with significant events such as Trump’s legal issues and Biden’s withdrawal from the race, though these have not disrupted the typical market trends during an election year. These trends are generally positive during election years and only negative when the economy enters a recession during that year.
It was expected that the Federal Reserve (the “Fed”) would keep the federal funds target range at 5.25% to 5.5% for the eighth time in a row. It has been longer than usual--a full year--since the Fed last raised rates. Jerome Powell, the Chairman of the Federal Reserve Bank, has prepared markets for a September rate cut. They’ve provided hints to markets around moderating job growth and higher unemployment rates, giving reason enough to warrant a cut. The bond market generally performs well ahead of the first interest rate cut in a cutting cycle. We’re optimistic that bonds may outperform stocks during this volatile period for the economy.
We expected this volatility, given that we’ve been long overdue. We will remain data-driven in our decision-making regarding our portfolios as we continue to analyze the current state of the economy. Please reach out to us if you have any questions or concerns.
Disclaimer Statement
Ned Davis Research, Inc. (NDR), any NDR affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any NDR publication. In no event shall NDR, any NDR affiliates or employees, or any third-party data provider, be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.
The data and analysis contained in NDR's publications are provided "as is" and without warranty of any kind, either expressed or implied. The information is based on data believed to be reliable, but it is not guaranteed. NDR DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.
NDR's reports reflect opinions of our analysts as of the date of each report, and they will not necessarily be updated as views or information change. All opinions expressed therein are subject to change without notice, and you should always obtain current information and perform due diligence before trading. NDR or its affiliated companies or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed in NDR's publications and may purchase or sell such securities without notice.
NDR uses and has historically used various methods to evaluate investments which may, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior NDR recommendations or NDR performance rankings, one should also consider that NDR may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transaction costs or management fees or reflect actual investment results, that other less successful recommendations made by NDR are not included with these model performance reports, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. Unless specifically noted on a chart, report, or other device, all performance measures are purely hypothetical, and are the results of back-tested methodologies using data and analysis over time periods that pre-dated the creation of the analysis and do not reflect tax consequences, execution, commissions, and other trading costs. For these and for many other reasons, the performance of NDR's past recommendations and model results are not a guarantee of future results.
Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such devices. NDR believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider differing viewpoints and use a weight of the evidence approach that fits their investment needs. Any particular piece of content or commentary may or may not be representative of the NDR House View, and may not align with any of the other content or commentary that is provided in the service. Performance measures on any chart or report are not intended to represent the performance of an investment account or portfolio, as some formulas or models may have superior or inferior results over differing time periods based upon macro-economic or investment market regimes. NDR generally provides a full history of a formula or model's hypothetical performance, which often reflects an "all in" investment of the represented market or security during "buy", "bullish", or similar recommendations. This approach is not indicative of the intended usage of the recommendation in a client's portfolio, and for this reason NDR does not typically display returns as would be commonly stated when reporting portfolio performance. Clients seeking the usage of any NDR content in a simulated portfolio back-test should contact their account representative to discuss testing that NDR can perform using the client's specific risk tolerances, fees, and other constraints.
NDR's reports are not intended to be the primary basis for investment decisions and are not designed to meet the particular investment needs of any investor. The reports do not address the suitability of any particular investment for any particular investor. The reports do not address the tax consequences of securities, investments, or strategies, and investors should consult their tax advisors before making investment decisions. Investors should seek professional advice before making investment decisions. The reports are not an offer or the solicitation of an offer to buy or to sell a security.
