Despite an expected pick-up in volatility into year-end we remain bullish on markets and the economy. We advise focusing on high-quality, growth equities in public market and non-core fixed income such as floating rate and short duration structured credit.

KEY POINTS

A Strong Start for Markets, but Focus Remains on the Fed

• Recent negative economic data surprises suggest US growth is softening; Investor return expectations need adjusted.
• Sticky inflation and expectations for Fed rate cuts remain top of mind and key drivers of markets, and a support for any weakness in the economy.
• Volatility is likely to increase around the US Presidential elections, but ultimately we expect the election won’t be a catalyst for markets.
• Portfolio diversification continued to fail as mega-cap tech drove the market in 1H24, outpacing all other equity asset classes. We think the rally broadens into year-end and suggest investors focus on US high quality, growth equities.
• Traditional fixed income is still facing headwinds; Floating rate, short duration structured credit, and money market funds provide better opportunities for investors

Exhibit 1:
Key Markets Performance in 1H24

Federal Reserve policy and interest rates dominated market headlines and drove markets in the first half of 2024. Midway through the year the market is up 15%, and historically when the market is up over 10% for the first six months it finishes the year positively (and usually above the midyear level). We echo this view and expect momentum to persist and keep pushing markets higher into year-end.

Exhibit 2:
Major Market Performance 2024YTD

That said, our bullish outlook is not without some concerns. We expect volatility to pickup after a mostly subdued 1H, especially given the upcoming US Presidential election and expected rate cut(s) by the Fed. And economists continue to closely analyze inflation and labor market data to determine their impact on the probability and timing of rate cuts, all of which is likely to keep investors on edge.

With so much speculation on the timing of rate cuts speeches by Fed members and minutes of recent Fed meetings are now highly scrutinized for clues about the central bank’s next steps. Markets expect the Federal Reserve to start cutting interest rates before year-end, but the projected timing of the first rate cut remains uncertain. In our view, if inflation reports continue to show progress, we think a cut before December is likely.

Exhibit 3:
Consumer Revolving Debt and Delinquencies

Serendipitously, the timing of the Fed’s first rate cut may align with (actual) weakness in the economy. Economic data is starting to soften as retail sales, job growth and manufacturing activity all slow, and consumer debt (specifically credit card) rises. However, in our view the real question is whether the economy is slowing or simply returning to a pre-pandemic normal. In either case, a Fed rate cut would likely help ease any concerns of investors.

We have remained optimistic and bullish on markets throughout this rally and even with economic data softening continue to advocate a bullish stance. The economy and markets are in a unique situation where even if economic data weakens the timing now aligns with Fed rate cuts and loosening policy. As such, we think there is an inherent level of support from the Fed for any weakening in the economy, which makes us optimistic on the outlook going into year-end

ENDNOTES

Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.