Investment Newsletter-Wela Financial Advisory-July 2024
As we navigate through 2024, we are excited to share valuable insights on the economic and political climate that may shape your financial strategies.
In this edition, we focus on four crucial topics: the resilience of the U.S. economy, the state of inflation, potential interest rate cuts by the Federal Reserve, and the market effects of the 2024 Presidential election.
We also highlight our recent team-building event at the San Antonio Botanical Gardens.
1. A Resilient U.S. Economy Counterbalances Weakness in Europe and China
Better-than-expected jobs reports in May and June showcased the enduring strength of the U.S. economy, against a backdrop of high interest rates and persistent inflation.
In May, the U.S. Bureau of Labor Statistics data showed that American employers hired 272,000 workers, surpassing economists' expectations of 190,000 jobs added. This hiring surge exceeded the average number of jobs added each month over the previous year and accelerated notably from the 175,000 jobs added in April.
However, the June jobs report presents a more nuanced picture: On the one hand, the U.S. economy added slightly more jobs than expected at 206,000, while on the other hand, the unemployment rate ticked up to 4.1%.
Nevertheless, the U.S. economy remains resilient, and the relative slowdown in job growth last month comes after four years of robust economic expansion. To put things in perspective, the unemployment rate is now around the same level as it was before the coronavirus pandemic.
In fact, the World Bank recently raised its global growth outlook, attributing much of this optimism to resilient consumer spending in the United States.
The U.S. economy is now expected to grow by 2.5 percent this year, an increase of 0.9 percentage points from January projections. This upward revision is primarily driven by robust consumption and government spending, along with a decrease in imports.
World Bank Deputy Chief Economist Ayhan Kose highlighted that the upgrade to the U.S. outlook accounts for 80 percent of the increase in the global growth forecast for 2024. This positive adjustment underscores the critical role of the U.S. economy in stabilizing global economic dynamics amid weaknesses in Europe and China.
A growing U.S. economy is a very good sign for the health and future performance of public markets.
2. Inflation: Falling but Stalling
While high interest rates are theoretically designed to curb consumer demand and slow price increases, the reality has been more complex.
Speaking in a panel discussion at the European Central Bank’s monetary policy conference in Portugal, Fed Chair Jerome Powell said that data for April and May “do suggest we are getting back on a disinflationary path.” However, Powell insisted that Fed officials want to see inflation come closer to the 2% target before they could confidently say they defeated inflation.
Inflation has significantly decreased from its peak of 9.1%, but it remains more than a percentage point higher than the Federal Reserve's target rate of 2%. Moreover, inflation exceeds inflation rates in Japan, the U.K., and the Eurozone.
The persistent gap between current inflation rates and the Fed’s target suggests that monetary policy will remain crucial in the coming months. Understanding these dynamics is essential for investors as they strategize to protect their portfolios against potential inflationary pressures.
3. Rate Cuts by the Federal Reserve on the Horizon
How will the steadying economy and persistent inflation influence the Federal Reserve’s monetary policy?
Stepping back and looking at the big picture, recent data indicating a cooling U.S. labor market has bolstered the confidence of Fed policymakers that their efforts to control inflation are yielding results. Progress is being made in discussions about potential interest rate cuts, with more active debates expected during the Fed's meeting in late July.
However, Fed officials are keenly aware that cutting rates too early could reignite inflation. During his panel discussion, Powell cautioned that premature rate cuts could lead to a resurgence of inflation, prompting policymakers to reverse course and reinstate severe rate hikes. Conversely, delaying rate reductions for too long risks weakening the economy to the point of potentially causing a recession.
During his appearance on Tuesday, Powell affirmed that the U.S. economy and job market remain fundamentally healthy, enabling the Fed to deliberate carefully on when to implement rate cuts. Most economists expect the Fed's initial rate reduction to occur in September, with the possibility of another cut by year-end. If these forecasts prove accurate, rate cuts could create new opportunities for investors.
Lower interest rates have the potential to stimulate economic activity by reducing borrowing costs, thereby encouraging increased investment and consumption. Naturally, this stimulated economic activity could benefit various asset classes.
We share the general optimism regarding the underlying strength of the U.S. economy and the Fed’s ability to bring inflation down to its target of 2%. We continue to closely monitor the situation to make necessary portfolio adjustments and capitalize on emerging trends.
4. Potential Beneficiaries of Red or Blue Wave Outcomes
As the 2024 Presidential election approaches, investors wonder how the political landscape is set to influence market dynamics. While there may be some short term volatility due to the sensationalist nature of the 24-hour news cycles, history has proven that elections have little effect on the long term performance of the U.S. markets.
Historically, stock markets have shown resilience and growth across different political regimes.
Rising markets don’t necessarily reward all sectors of the economy equally, as both parties have varying visions and priorities.
A victory for a Republican candidate could favor industries that benefit from deregulation, increased defense spending, and support for traditional energy industries.
Conversely, a Democratic candidate's victory could positively impact sectors that generally promote clean energy initiatives, infrastructure development, and support for innovation in tech and manufacturing. Understanding these nuances and potential sectoral shifts can help investors optimize strategic allocations in anticipation of the election results.
Investors should consider how policy changes under either administration could impact sectors such as healthcare, technology, and energy. Understanding these potential shifts will enable investors to position themselves advantageously, regardless of the election outcome.
Special Announcement: Wela's Team Building During Community Service
In addition to providing quarterly market insights to help you navigate the markets to make informed decisions, we are delighted to share highlights from our recent team building event.
Our entire team had an enriching day volunteering at the San Antonio Botanical Gardens, where we assisted with a mulching project throughout the garden. This activity not only allowed us to give back to the community but also strengthened our teamwork and camaraderie.
After a productive day, we enjoyed a delightful meal together at Fife and Farro in the Pullman Market. We believe that such experiences enhance our cohesion and dedication, ultimately benefiting our clients through improved collaboration and service.
Concluding Thoughts
As we enter the second half of 2024, our commitment to providing industry-leading financial advisory services remains unwavering.
We are eternal optimists, and the resilience of the U.S. economy, positive trends in inflation, potential rate cuts in Q3, and the relative insignificance of the Presidential election’s long-term impacts on the markets simply reinforce this sentiment. In the words of Warren Buffet: “Never bet against America”.
We are always available to guide you through turbulence and uncertainty, ensuring that your investment strategies are well-informed and aligned with your financial goals.
Thank you for your continued trust in our expertise and dedication to your cause.
We look forward to helping you fulfill your aspirations.
Warm regards,
Your Wela Financial Advisory Team
P.S. Our 2024 Annual Client Satisfaction Survey concluded on July 26th. Thank you to all who participated and provided you honest feedback! We are analyzing the results and will share updates in the next couple of weeks! Thanks again!
Brent Forrest & Associates, LLC. dba Wela Financial Advisory (Wela) is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein
