Q2 2024 Investment Outlook
Letter to Clients
Are Investors Too Optimistic?
With global stock markets off to a solid start to 2024, investors seem hopeful that the U.S. economy may ease into a soft landing cushioned by a series of Federal Reserve (Fed) interest rate cuts. While there are plenty of reasons to have a positive outlook, it’s important to note that potential threats remain, and we can’t be sure that the economy will escape a recession.
In this Q&A, American Century Investments CIO Victor Zhang discusses his outlook and highlights potential risks that could affect investors in the months ahead.
Has the Fed Guided the Economy to a Soft Landing?
The chance of a soft-landing scenario has increased with a resilient labor market and declining inflation. Against the Fed’s target inflation rate of 2%, recent Consumer Price Index (CPI) and core CPI (excludes food and energy prices) readings suggest there’s still more room for inflation to fall. The readings came in at 3.2% and 3.8%, respectively.1 So, it’s still early to say we have achieved a soft landing.
Indeed, the trends have been positive in the U.S. The labor market has been robust, and subdued energy prices and fiscal stimulus, such as the Inflation Reduction Act, have helped soften the impact of high interest rates. Furthermore, financial strain has been limited, thanks to muted stock market volatility and a relatively low number of loan delinquencies. This stands in contrast to the downturns resulting from the global financial crisis and the burst of the dot.com bubble.
Still, it’s important to remember that the U.S. economy is weathering higher rates better than many other countries. Indeed, the U.K. and Japan are among the developed market economies that have entered technical recessions (two consecutive quarters of negative economic growth). Six other nations, including Germany, reported their economies contracted in the fourth quarter of 2023.2
As we’ve said from the beginning, soft landings are rare. Our current view is that the economy is on track for a period of below-trend growth. But, there’s still a risk that the Fed might hold rates too high for too long, sending the economy into recession.
What Are the Main Risks that Could Derail a Soft Landing?
Consumer spending represents two-thirds of the U.S. economy. So, consumer spending, confidence and employment conditions are influential factors in achieving a soft landing. The latest economic readings seem to suggest moderation in each of these areas. Since employment data is a lagging indicator, we consider any significant setbacks in consumer confidence or spending to be threats.
What’s the Fed’s Next Move?
The Fed and the world’s other central banks have managed the economic balancing act but still need to stick the landing. If they cut too soon, they risk reigniting inflation. If they don’t cut soon enough, the global economy could stall.
From a Fed-watching perspective, this puts investors in a situation when bad news can be good news. If there’s a slowdown in economic growth, the job market weakens or consumer spending declines, it tends to encourage disinflation. In turn, this boosts the Fed’s confidence in cutting interest rates.
A pivot to lower rates would put more money in the hands of consumers because they’ll be spending less on mortgages, auto loans and credit card debt. Indeed, Fannie Mae expects rates on 30-year mortgages to fall below 6% in 2024 – nearly 2 percentage points below the highs reached in 2023.3
In addition, lower rates enable businesses to refinance debt and may make them more willing to borrow the money they need to gain efficiencies or expand operations. Lower rates also tend to be positive for stock prices.
National Elections Will be at the Top of People's Minds Worldwide in 2024. Should Potential Election Outcomes Affect Portfolio Decisions?
The election calendar is full as voters in countries accounting for 60% of the world’s gross domestic product head to the polls this year.4
In addition to the presidency, 34 Senate and all 435 House seats are up for grabs in the U.S. Other notable elections in Mexico and India will determine heads of state. In addition, European Union parliamentary elections are on tap for June. The U.K. hasn’t scheduled an election for 2024, but there’s a possibility the prime minister could set one later this year or by January 2025 at the latest.5
This high level of election activity, heightened policy uncertainty and political polarization could lead to market volatility. This could be especially true in the U.S., where the presidential election promises to be tight, and the balance of power in Congress could be razor-thin.
While it may be tempting to head to the sidelines amid volatility or invest based on expected election outcomes, we believe investors should maintain a diversified investment approach.
Thank you for entrusting us with your capital.
¹ U.S. Bureau of Labor Statistics, as of March 12, 2024.
² India Today, “UK, Japan only the tip of iceberg, 18 other countries at risk of recession,” February 20, 2024.
³ Fannie Mae, January 18, 2024.
⁴ “BofA Global Research Calls 2024 the ‘Year of the Landing,’” Bank of America Securities, November 27, 2023.
⁵ Danica Kirka, “An election in the UK is likely this year, we just don’t know when. Here’s what we know,” Associated Press, March 1, 2024.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.