The economy remains on track to achieve a soft landing, although it is taking a bit longer than some analysts had originally forecast.  Inflation is slowly coming down in an economy that is generating modest growth and solid employment.  Corporate profits are having a good year.  In their recent meeting, the Federal Open Market Committee (FOMC) confirmed their next phase of monetary policy is likely to include a reduction in interest rates later this year.  Another election is coming.  Thankfully, the capital markets seem to be largely ignoring the drama in DC.

In an otherwise positive quarter for capital markets, there was some price volatility as the Federal Reserve held steadfast in their fight against inflation.  Some Wall Street analysts had hoped for interest rate reductions by now, but the Fed’s “dual mandate” is employment and price stability.  As long as employment remains solid, there is no hurry for the Fed to reduce rates until their inflation target has been fully met.  In their June meeting, the FOMC reiterated this position and confirmed that rate reductions are still in their forecast.  A scenario of mild economic growth, lower inflation and easing monetary policy continues to be the most probable environment for the remainder of 2024 and 2025.  A full one percent reduction in the Federal Funds rate over the upcoming year is in the Fed’s forecast.

Employment continues to surprise on the upside.  The latest report showed job gains of 272,000 for the month of May, which kept the official unemployment rate unchanged at 4.0 percent.  Any figure below five percent is generally considered “full employment” for our economy.  There is always some level of unemployment as people change jobs over time.  The overall number of people unemployed and the labor force participation rate have both remained relatively stable during the first half of the year.

Corporate profits have been doing well, too.  The pandemic-related supply shocks have disappeared, and inventories are back to normal.  According to the FactSet data service, profits for companies that represent the S&P 500 index are on track to grow by 11 percent this year over last year’s figures.  This positive operating environment has raised valuations.  With stocks trading near record-highs, the forward Price/Earnings (P/E) ratio for the S&P 500 index is around 21x, which is above historical averages.  Technology stocks have been on a run, so their higher P/E ratios now weigh more heavily in the index.  The future looks bright for technology companies, although their stock prices are prone to big swings in value.  When there is a pronounced surge in the price of a company’s shares, it is a challenge to decide when to take some profits.  However, history has shown that bad things can happen to even the best of companies.  Over time, trimming back on winners will help investors to avoid concentrations of risk in their portfolio.  Today’s big winners were probably purchased with the proceeds from selling or trimming back on other positions in the portfolio a while ago.

Wall Street appears to be largely ignoring the upcoming Presidential election.  That is probably good news, as the partisan drama is expected to intensify in the weeks leading up to the November 5 vote.  Conventions will happen this summer, with the Republican National Convention taking place in Milwaukee from July 15 through 19, and the Democrat National Convention being held in Chicago from August 19 through 22.  News stories have speculated about potential surprises that could disrupt the anticipated “Biden versus Trump” rematch.  At a minimum, we expect to get confirmation regarding who will be the candidates for President and Vice President for the two primary political parties by the end of summer.  Analysts have run the numbers on historical performance for the capital markets, and it is hard to draw any solid conclusions regarding how an election could impact securities prices over the upcoming new Presidential term.  The outlook for interest rates and corporate profits tends to have a more important role than politics when it comes to building wealth for investors.  

The second quarter of 2024 was positive for the markets, and the economic forecast remains a productive one for investors.  The overall impression is that of modest growth, solid employment and a more accommodative Federal Reserve.  Companies are able to generate strong operating results in that environment.  We head into the second half of the year with portfolios in good shape.

We send our very best wishes, and we hope you enjoy some nice family time together over the summer.  Please contact us with any questions.