Opinion: What to expect in the second half of 2024

As we prepare to put the first half of the year behind us, developments over the second half of the year could have significant effects on the U.S. economy for years ahead. Here are some key metrics to watch.

Year-to-date overview
Major stock markets reached new all-time highs. Inflation has trended up since the start of the year instead of down toward the Federal Reserve’s 2% target. Unemployment has remained strong, holding right around 4%. Interest rates have crept back up close to the October 2023 highs with the 10-year treasury touching 4.7% in April and 30-year mortgage rates remaining above 7%.

Recent Fed action
In January, the consumer price index posted a reading of 3.1%. In May, the rate was 3.3%, year-over-year. Earlier this year, according to the Bureau of Labor Statistics, the market had anticipated a summer interest rate cut as a victory over inflation, but the data has removed that possibility along with the corresponding optimism.

However, in June, the Fed will begin to slow the pace of the reduction of its balance sheet, which has been welcomed by investors.

During COVID, the Fed began to purchase $80 billion of Treasury securities and $40 billion of mortgage-backed securities per month to help inject money into the economy to stabilize prices and keep people working. By the end of the pandemic, the total amount of securities held by the Fed swelled to a hefty $8.5 trillion, which was an increase of more than $4 trillion over the pre-pandemic level, according to “The Federal Reserve’s Balance Sheet as a Monetary Policy Tool: Past Lessons and Future Considerations” by G.M. Bowman.

Beginning in 2022, the Fed began a mission to reduce the balance sheet to a more manageable level. The committee did this by simply not reinvesting the proceeds from these maturing bonds in the portfolio to the tune of $95 billion per month: $60 billion in Treasurys and $35 billion in mortgage-backed securities. This effectively removed cash from circulating in the economy and worked toward shrinking the Fed’s balance sheet.

Starting in June 2024, the Fed will allow “just” $25 billion in  Treasurys to run off the balance sheet each month, compared to the $60 billion it had been doing up until then.

The run-off rate for mortgage-backed securities will remain at $35 billion per month. Therefore, the economy will have a bit more money to work with (a cool $35 billion per month) to cushion the economy while the Fed continues to combat inflation and orchestrate a soft landing.

Interest rate cuts
Allowing more money to circulate in the economy coupled with a prospective rate cut if inflation moderates could be positive for financial markets. The trick for the Fed is knowing when to pull that lever. The questions to ask are when will that day come and what will bring it about, a victory over inflation or a deteriorating economy?

If the Fed drops rates too fast, they risk inflation escalation. If the Fed holds rates too high for too long, they risk a U.S. recession. The U.S. GDP growth for the first quarter 2024 came in much weaker than expected, posting a 1.3% gain versus an expected 2.4% increase over first quarter 2023. Although a positive number, this miss could perhaps be a warning sign of a slowing economy, which could require accommodative monetary policy.

Keep your eye on the level of inflation, wage growth, unemployment, and GDP for the rest of the year. These metrics will help shape the action of the Fed.

Politics and portfolios
Also looming in the back half of the year is the presidential election. At the start of the year, it looked likely that neither party would have enough support to gain all three branches of power. However, that has shifted in recent days with some analysts showing a slim possibility for a Republican sweep.

Prior to the George W. Bush administration, the last time the Republicans held a trifecta was in 1953, and the last trifecta for the Democrats was in 1993. Since the turn of the century, our political climate has grown increasingly divided. We have had four trifectas since 2001. The Republicans held a trifecta twice for a total of approximately eight years: six years with Bush and two years with Trump. Since 2001, the Democrats have also held a trifecta twice; two years with Obama and two years with Biden.

During the most recent time that the Republicans had control of all three branches under President Trump, the Tax Cuts and Jobs Act of 2017 passed with zero Democrat votes. Likewise with the Democrats in charge of all three branches, the Inflation Reduction Act of 2022 passed under President Biden with no votes from the Republican party.

Gridlock could be perceived as a positive for financial markets because it would decrease the likelihood of major changes in policy. However, personal tax rates are scheduled to be higher in 2026 if Congress fails to work together to adjust current law. Given the track record of our political leaders to not do that very well, proper tax planning should be considered ahead of the scheduled sunsetting of personal tax rate at the end of next year.

Work with your financial professionals to build a portfolio that outpaces inflation, matches your long-term goals and helps you keep a steady hand in times of economic distress, exuberance and political discord. 

Andy Drennen is a certified financial planner and senior portfolio manager at Simmons Private Wealth in Springfield. He can be reached at andy.drennen@simmonsbank.com.