First Quarter 2024 Market and Economic Review

If there’s a theme that reflects the first quarter of 2024, it would certainly revolve around a storyline of cautious optimism. Yes, there are many indicators that seemingly point to a healthier economic environment, including more subdued inflation, low unemployment figures, and positive trading on Wall Street. However, there are also some nagging influences that are just treacherous enough to keep us looking over our shoulders. Issues like climbing debt, declining individual savings, global instability, and a disproportionately weighted S&P 500.

We’ll address these items in more detail further down, but first, let’s address the top factors driving economic conditions.

What are the top 4 influencers of the economy?

As we see it, the four primary influencers on the economy are:

1. Interest rates
2. The strength of the consumer
3. The outlook for inflation
4. A pivot on the belief that the U.S. economy can ‘land soft’

The Federal Reserve has now gone two-plus quarters without raising its interest rate. And, at its last meeting in March, the Fed indicated that it expects to begin cutting back on its rate later this year offering the possibility for three cuts spread throughout the year. This was news that most economists expected, as did the markets which responded accordingly with steady growth throughout the quarter.

Going hand-in-hand with the Fed’s interest rate is the general outlook on inflation. The tone of the Fed has changed regarding its view on inflation. Throughout last year, the Fed was speaking in finite terms about holding up rates until inflation dropped to 2 percent. Now, the Fed admits that it is open to cutting its rate as inflation has hit the 3-percent range so long as inflation continues a downward trend.

Also tied to these factors is the general outlook on the U.S. economy. For much of last year, there was reasonable skepticism that the Fed could achieve a so-called soft landing — a gentle decline to 2 percent inflation without triggering a recession. Today, there’s a wide consensus that a recession is not imminent, further benefiting market performance in the first quarter.

While the delicate levers the Fed has at its disposal to fight inflation look to be doing their job, some of the obstinance they’ve faced can be attributed to the strength of the consumer. Today, consumables make up about 67 percent of the U.S. GDP, while the next largest piece of the pie – government spending – comprises about 17 percent.

Why is consumer spending so strong? Some of it is the still lingering demand generated by the unavailability of goods during the Covid-19 pandemic. Plus, the U.S. government was very generous with incentives to keep the economy pumping. These are also the triggers that helped create the sky-rocketing inflation as we emerged from the pandemic.

The global economy

It’s generally safe to say that whatever the U.S. is experiencing is felt around the world since the U.S. economy comprises roughly 50 percent of the world economy by capitalization. However, many of the top international markets are facing a greater challenge in staving off inflation and recession. For most of Europe, these challenges are mostly related to two factors: conflicts in Ukraine and Israel and governments who were much less generous with pandemic relief.

The U.K. economy met the technical definition for inflation in late February, and it is widely reported that Germany is in the same situation, though the German central bank has made no official declaration.

Essentially, the European governments did not provide as much pandemic relief to their people as the U.S. did – a debt that could certainly haunt the U.S. down the road.

China’s economy continues to slowly claw its way back from the extremely stringent lockdowns their people and economy endured throughout the pandemic. Most outside economists project there is still a lengthy road ahead for China’s recovery. Also, much of the banking system is still stretched very thin thanks to an overbuilt housing boom that started decades ago.

Things we’re keeping an eye on

Looking ahead at the remainder of the year, we’ll be watching most everything very closely for our clients, but there are a few elements that are a little more under-the-radar that deserve more attention than they are currently getting.

Being an election year, politicians on both sides are likely still sizing up how they want to address a legacy taxation policy from Trump’s presidency that is set to expire at the end of the year 2025. To help stimulate the economy at the time, Trump signed an expansion on the estate tax rules that essentially protected estates up to $15 million (for individuals) and $30 million (for couples). If that provision expires next year, those protections will fall back to their previous marks of $6 million and $12 million and expose potentially $18 million dollars to additional taxes for qualifying families.

At the moment, many CPA’s and estate attorneys are assuming the provisions will be allowed to expire. That’s the safer approach as setting up trusts and arranging other means to protect those assets can be tedious and requires significant planning.

Another area of economic interest is how our inflation rate reacts to essentially opposite forces currently taking place. The Fed’s prime interest rate – which is their primary weapon against an overly hot economy – is receiving lots of attention and justifiably so. What’s interesting though, is that the Biden administration still has some programs in place that are providing stimulus dollars into the economy.

Effectively, one side is stepping on the brakes while the other is stepping on the accelerator. As we go forward, it will be a delicate balance for both sides to ease up and achieve the so-called ‘soft landing.’

Lastly – for this editorial piece, anyway – we’re also keeping a close watch on some developing investment themes. We’re often asked about specific cryptocurrencies or the latest artificial intelligence company making headlines. In both cases, there’s likely too much risk to invest heavily in a single entity. However, there’s little doubt in our eyes that both blockchain (the technology that makes cryptocurrencies possible) and artificial intelligence will produce many winners. The key is to invest broadly and intelligently across those fields to achieve outcomes that meet long-term portfolio goals.