Q2 and Beyond - Broadening Participation, Presidential Regimes, and Reflation
2024 began in a similar fashion to 2023, with much debate over a soft or hard landing as the Fed attempted to fight inflation and stabilize the economy. Though substantially different than in 2023, in 2024, the debate shifted from the continuation of ‘22s’ bear market to the sustainability ‘23s’ ripping market rally.
Only three months later, those concerns gave way to the Fed’s plans to reduce interest rates, which has resulted in a strong market rally. The S&P 500 index, Dow Jones Industrial Average, and Nasdaq have gained 10.2%, 5.6%, and 9.1% for the first quarter, respectively.
While the markets continue to see through rose-colored glasses, the economic environment has surprised many. Inflation has stopped falling and is reaccelerating, and unemployment remains under 4% despite layoffs in the tech sector, significantly higher interest rates, and several large bank failures.
Despite the above, with the next phase of monetary policy and the presidential election on the horizon, many investors are leery. These worries are only amplified by the markets’ hovering near all-time highs.
Steady economic growth has driven markets to new all-time highs
The S&P 500 achieved 20 new all-time highs in Q1 despite the brief market pullback during the year’s first two weeks. While new highs generally are positive for investors, it is also natural to worry if the markets’ ascent is sustainable. In other words, do new all-time highs mean the market is due for a pullback?
While volatility is an unavoidable part of investing, using history as a guide illuminates that during a bull market cycle, major stock market indices spend a significant percentage of time near record levels, as detailed in the previous chart. Getting more specific, 2021 experienced 70 days of the market closing at new all-time highs, adding to the hundreds achieved since 2013.
By understanding these long-term market tendencies, investors can benefit without constantly worrying about the next pullback. Additionally, holding an appropriately diversified “all-weather” portfolio helps to withstand volatile periods and not over-analyze the exact market level.
2. Markets have rallied through both Democratic and Republican presidencies
With the presidential election just seven months away, the race is heating up ahead of the rematch between Presidents Biden and Trump. I’ll always advocate for being active in the democratic republic system that we are so blessed to live in. However, it’s critical to vote at the ballot box and not with your portfolios.
And here’s why: History shows that markets perform well under both party regimes. As detailed in the chart above, the economy and stock market have grown substantially, regardless of who was in the White House.
What did matter over these periods were the ebbs and flows of the business cycle. Said differently, business and market cycles defined their presidencies, not the other way around.
Now, I’m not saying that politics and political regimes do not impact the economy and markets through taxes, expenditures, deficits and debts, foreign trade, industrial output, regulations, new construction, monetary policy, etc.; however, these policy changes are incremental, slow-moving, and affect the economy and markets with substantial lags.
That said, it’s far more critical to focus on the underlying economic and market trends and, even more ideally, on the impact of specific policies on an individual’s wealth plan and strategy.
3. The Fed is expected to cut rates as inflation remains sticky high
With the expectation of easing monetary policy, the market rally broadened beyond mega-cap technology stocks -the Magnificent-7 - last quarter. The equal-weight S&P 500 hit a new all-time high in early March, which is a healthy indication that a wider range of stocks are participating in the rally.
The chart above illustrates the possible path of the federal funds rate based on current market probabilities, which includes three cuts this year. At their last meeting, the Fed cited strong job gains and low unemployment as indicators of solid economic activity.
Still, it emphasized that “the Committee does not expect it will be appropriate to reduce [interest rates] until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” Regardless of how confident we are of inflation moving sustainably to The Fed’s target, it seems ever more apparent that they will find said confidence.
Further, regardless of the exact timing of rate cuts, these projections represent a reversal of the inflation-induced emergency monetary policy actions initiated in early 2022. For investors, it’s critical to adapt to this changing environment (economic and inflation reacceleration - see Inflation Infection - How Easy Money and GDP Growth Will Embed Inflation) and not focus solely on the rear-view mirror.
The bottom line: With markets near all-time highs, a presidential election approaching, rate cuts expected to begin this year, and broader equity market participation, adapting to the new economic climate ahead of us is crucial to maintain perspective and forward progress toward financial goals.
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Matt Faubion, CFP®
Founder - Wealth Manager
This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, accounting, and financial professionals if you want more information. This content is developed from sources believed to be providing accurate information, and provided by Copyright (c) 2024 Faubion Wealth Management LLC. All rights reserved. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.