Equity market performance has been strong in 2024, but the economy seems to have peaked. The unemployment rate has moved up to 4.1% and aggregate U.S. economic data has failed to match consensus expectations. However, equity markets have largely ignored the economic data and remain fully focused on the Federal Reserve’s interest rate policy. Recent inflation data continues to point to a possible interest rate cut in September, but the Fed has not provided a clear timeline. We have seen large market movements whenever the Fed issues a new statement. With rates relatively high, the information technology sector has continued to be the top performing sector, pushing both the Dow Jones Industrial Average and S&P 500 to all-time highs.
For the first half of 2024, smaller capitalization stocks, “value” stocks, and high-quality bonds were left behind as their interest rate sensitivity worried investors. However, interest rate sensitive assets showed strong gains in early July as anticipation of the first interest rate cut grows. These assets would likely continue to perform well if the Fed were to surprise markets with an earlier than expected rate cut, if the reason for the cut was due to easing inflation and not an underwhelming economy.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm.