Opinion: What should investors expect for the rest of 2024?

Don Davis

Entering the second half of 2024, we find ourselves in an environment that contradicts the forecasting tools we traditionally use to assess economic and market conditions. For example, an inverted yield curve, when yields on two-year Treasury bonds are higher than yields on 10-year bonds, has been in place for nearly two years, making it the longest-ever inversion. 

Historically, a yield curve inversion has been a tried-and-true recession indicator, preceding 10 of the past 10 U.S. recessions. Rather than experiencing recessionary conditions during this period, however, we have seen stronger economic growth the longer the curve has been inverted.

Given the inverted yield curve, investors have been enjoying yields from short-term investments like Treasury bills, certificates of deposit and money market funds for the first time in years. Meanwhile, housing continues to be in unique territory, with higher interest rates constraining buyer activity while the lack of available single-family units for sale is keeping home prices at lofty levels.

The economic resilience we are experiencing in the face of elevated interest rate conditions has produced an unexpected soft landing for the U.S. economy. Over the past few quarters, financial markets have been enthusiastic over the prospects that the Federal Reserve would shift away from its hawkish monetary policy and start to lower its overnight federal funds rate. 

Instead, a higher-for-longer interest rate scenario has emerged, as robust job growth and steady economic expansion continues despite stubbornly high inflation. As a result, Fed policymakers have shown no desire to commence with rate cuts until they are convinced risks to the growth outlook outweigh the risks of continued inflation pressures. 

Looking at the financial markets, strong earnings have been the catalyst for year-to-date equity returns and will likely continue to do so for the rest of 2024. While the narrow leadership of mega-cap growth stocks continues to dominate today’s equity markets, investors may see gains broadening across the equity spectrum in the near term. One reason is artificial intelligence, which continues to excite investors about the possibilities of this emerging technology. 

The 2024 presidential election is about to take center stage. This is noteworthy because election years historically deliver increased market volatility during the months of campaigning, then ease closer to Election Day. 

Fixed income markets continue to see higher yields and many income-oriented investors have benefited. More than $1.5 trillion has poured into money market funds since the Fed began its rate-hiking fight against inflation over two years ago. However, investors would be encouraged to not become complacent that such a cash-friendly environment will endure. 

While it may still be months before the Fed takes any action to reduce short-term rates, the time to take advantage of longer-term yields is often before rate cuts occur. This presents an opportunity to lock in some of the higher yields currently available by adding longer-duration bonds to an investment portfolio. 

Investors face many complexities as they attempt to navigate our current economic and market conditions. Finding a wealth management partner who understands the dynamics of today’s environment is a crucial step to staying focused on long-term financial goals. 

Don Davis is a senior portfolio manager with Commerce Trust. He can be reached at don.davis@commercebank.com.