By: Michael W Arone, CFA, Chief Investment Strategist
A funny thing happened while investors foolishly obsessed about both the timing and number of Federal Reserve (Fed) rate cuts this year — the long anticipated US economic soft landing transpired over the past 12 months or so. Distracted investors likely missed it. But for only the fourth time since World War II and the first time in 30 years, the US economy, guided by the Fed, struck the rare soft landing. The economy slowed, but never entered recession. US GDP expanded at an annual rate of 4.9% in the third quarter of 2023, moderating to 1.6% for the first quarter of 2024.1
Despite slower economic growth, the labor market remains remarkably resilient. The US has added about 2.8 million jobs over the past 12 months, averaging monthly job gains of 234,000.2 Initial jobless claims data continue to suggest that businesses are reluctant to let go of qualified skilled workers. And, at 3.9%, the unemployment rate hovers near an all-time low.3 Gainfully employed consumers will go on spending, repelling recession for at least a little while longer.
Meanwhile, considerable progress has been made over the past couple of years to tame inflation. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) peaked at an annual rate of 9.1% in June 2022, cooled to 3% a year later, and sat at a still-too-hot 3.4% in April 2024.4 The Fed is likely pleased, but not satisfied, with inflation’s deceleration.
Yet, the first quarter earnings season reveals that businesses are in exceptionally good shape. Seventy-eight percent of S&P 500® companies reported a positive earnings surprise for the first quarter. Year-over-year earnings grew by 5.7%. S&P 500 companies’ net profit margin of 11.7% is above the previous quarter, year ago, and 5-year average. Analysts are predicting that S&P 500 companies will grow their earnings by 11.1% this year and an even better 14.1% next year.5
At the same time, several major economies including the United Kingdom, Europe, Japan, and China are now emerging from past bouts of economic malaise.
Investors have enthusiastically celebrated the soft landing by pushing global stock markets to all-time highs. Credit spreads are extraordinarily tight, and most measures of capital market volatility are restrained.
Must All Good Things Come to an End?
Although the environment for risk assets remains largely attractive, early gains from achieving the soft landing are likely in the rearview mirror for investors. It’s going to get tougher from here. The soft landing, resilient labor market, falling inflation, spendthrift consumers, strong businesses, and potential Fed rate cuts are already reflected in stretched valuations and record-high asset prices. Risks are decidedly skewed to the downside for the remainder of the year.
The increasing likelihood of a Fed monetary policy mistake, stubborn inflation, disappointing earnings results, toppling over the US fiscal cliff, rising geopolitical tensions, and contentious elections all pose serious risks to the rally.
But, after such a strong first half performance, it’s likely that capital markets will deliver solid results for investors this year, especially if the typical post-US election rally unfolds. Investors should consider these three strategies when constructing investment portfolios for the second half of 2024:
- Diversify Beyond Mega-cap Stocks
- Optimize Income with Short-term Core and Credit
- Position for Macro Volatility With Real Assets
This post first appeared on June 3rd, 2024 on the SSGA Traders’ Insight blog
PHOTO CREDIT: https://www.shutterstock.com/g/Bricolage
Via SHUTTERSTOCK
Footnotes
1 Bureau of Labor Statistics, April 25, 2024.
2 Employment Situation News Release, Bureau of Labor Statistics, May 3, 2024.
3 Employment Situation News Release, Bureau of Labor Statistics, May 3, 2024.
4 Consumer Price Index Summary, Bureau of Labor Statistics, May 15, 2024.
5 Earnings Insight, FactSet, May 17, 2024.
Important Risk Disclosure
The views expressed in this material are the views of Michael Arone through the period ended May 21, 2024, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
Past performance is not a reliable indicator of future performance.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Investing involves risk including the risk of loss of principal.
Diversification does not ensure a profit or guarantee against loss.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
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