2024 1st Quarter Economic Update for Retirement

Every three or four months, we have the privilege of having economist Andrew Opdyke on our show. He’s back to help us make sense of the economy ahead because, as we all know, 2023 ended better than many people expected.

We had ups and downs throughout 2023, but the start of 2024 has proved to be rather positive.

Will it stay that way? We asked Andrew to start our conversation about the Q1 2024 economic update.

What Andrew Has Seen in 2024 So Far in Q1 2024

We’ve seen some strong and weak data in 2024. At the end of 2023, the expectation was that the Fed would cut interest rates six times in 2024. Instead, we’re likely to see two or three rate cuts instead.

The Fed really wants to get inflation down to 2%, which is positive.

Personal consumption expenditure prices ticked higher last week on a year-on-year basis compared to the prior month. Inflation on the month was 3%, and there’s a lot going on here:

• Russia-Ukraine war
• Israel–Hamas war
• Earlier last week, a boat collided with the Francis Scott Key Bridge in Baltimore.

All of this is impacting economic recovery.

If inflation remains higher than the 2% the Fed wants to achieve, interest rate cuts may wait even longer. With all of this said, the economy is growing, consumers are continuing to spend, and only time will tell how things will play out.

In Q1 2024, markets are up, with strength in AI and Nvidia and the hype around these new technologies.

While the markets did react slightly to the lack of rate cuts for a day or two, there has been less pushback than expected.

Why Did Markets Not See a Pushback with the News on Rate Cuts?

If you look back to last year, we’re kind of in a continuation phase. At the beginning of 2023, if you had told people that the Fed was going to raise rates and that profits were going to be flat or slightly down, very few people would have predicted that the market would rise 24% in 2023.

Instead, what we saw was people willing to pay more for certain company stocks.

There’s almost a disconnect between the logic of the market’s performance because the top 10% of companies have about 75% of the market cap. Growth is sort of condensed in these companies, and this is the highest we’ve seen it going back about 100 years.

If you look at smaller cap companies, they’re still trading at relatively normal levels.

The question is, what happens if market conditions impact these major stocks that account for 75% of the market cap and everyone starts selling? We could see a lot of volatility.

Right now, the market is moving on the idea of AI and its potential, but we haven’t really seen the profits from the technology to justify this. We’re in a phase where we’re seeing growth based on potential hopes and expectations rather than evidence that these technologies will be the game-changers companies predict.

Elections, Negative Conversations and the Year Ahead

Election season is always interesting because of negative conversations, uncertainty, and doubt. We just don’t know what policies will look like or how they’ll impact the market, so it leaves a big question mark for investors.

And while we have a presidential election every four years, the market does brace for the mid-term elections every two years, too.

Presidential elections do heighten concerns, but what we notice is that there is always emotion during one of these elections. You have people on all sides saying, “If this person wins, I’m moving to Canada,” and it showcases:

• 50% of the country will be happy
• 50% of the country will be unhappy
• Everyone is going to go back to work

Regardless of who wins the election, you can be positive that Apple will be building another iPhone, and companies will continue producing products.

What the data tells us is that we’ll put a bunch of emotional energy into the election, and markets will have volatility before and during the election. But when the results come in, the market will tend to rise.

Once an election is over, companies tend to continue with their plans.

Short-term volatility is likely during an election, but after the “smoke clears,” markets tend to pick right back up, barring any major economic issues.

The Potential of a Recession and the Outcome

We may still see a soft landing and a potential recession, but it’s very unlikely to be a deep one. GDP numbers show that the U.S. economy grew 3% last year. Government purchases accounted for two-thirds of the growth, and we had a $1.8 trillion deficit.

Activity was led by healthcare and the government, which were responsible for roughly 50% of all job gains.

During normal times, these two account for 17% – 18% of all job gains.

When you dive into things, you’ll notice that there needs to be some healing to where the workers are. We haven’t seen a real transition back in certain sectors, such as tourism and restaurants.

Small- and medium-sized businesses are still facing an increase in rental costs, hiring, lending, and more.

Government support is really helping support the economy, but in other sectors, we are seeing companies adjust, such as in the tech sector, where layoffs are occurring. We’re at a point where there is a fine balance of government spending propping up the economy and the private sector readjusting.

We may see a weakening in employment, but if a recession does occur, it is likely to be a weak one.

Top Concerns for the Rest of 2024

If the Fed starts listening to the market and what the politicians want to happen, it poses a big risk. The Fed needs to stay the course and wait to cut rates until inflation is down enough because if they don’t, it can lead to inflation accelerating again.

Starting to cut rates too early will lead to short-term gains, but in the long term, we would need to raise rates again, restarting the whole cycle.

Spending remains too high.

The Fed lost $140 billion last year because they paid banks to hold onto the $200 billion the Fed gave to the banks a few years ago. We do need to get spending back in check, reevaluate and determine what is sustainable.

In an election year, parties want the economy to look its best. There is a concern that the wrong choices will be made to prop up the economy so that it looks good going into the election, even if that means long-term issues.

Excitement Outside of the Election

We’re seeing some broadening, which is always a positive thing. Earnings for the top 7 companies rose roughly 24% – 25%, but the rest of the 493 companies in the top 500 saw earnings decline 4%- 5%.

This year, we’re seeing earnings growth for the rest of the 493 companies.

You must remember that companies have had to do a lot and adapt to:

• Supply chain issues
• Worker shortages
• Regulations
• Interest rates

Many companies have found ways to be more productive and consistent with results. If the Fed continues to do its job and reduce inflation, we’re really putting these companies in an even better position in 2025.

Broadening out will ultimately be beneficial in the long term, even if the market isn’t reflecting it just yet.

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