Entering 2024, markets anticipated that the Fed would cut interest rates five to six times over the course of the year. Those expectations have been significantly scaled back due to strong economic growth and stubbornly high inflation in the first six months, which, in turn, caused interest rates to rise.
After a challenging first half of the year for bond investors, the rising interest rate environment has helped set the stage for a better second half. Fixed income valuations currently look favorable across several sectors, with various investment-grade bond sector yields at or near their highest levels in a decade.
In addition, though valuations are attractive, the headwinds bond investors faced early in the year are expected to soften or potentially reverse course by year-end. Inflation is set to slow as we enter the second half of the year and the Fed begins cutting rates later this year. Although markets no longer expect to see five or six rate cuts by December, one or two cuts remain possible and could spark a rally for bonds to close out the year.
Real Risks Remain
Risks to our outlook should be considered, with inflation remaining the primary domestic threat as we head into the second half of 2024. Although recent economic data releases give reason to believe that we’ll see slowing inflation ahead, a potential reacceleration of rising prices would likely rattle bond and stock markets.
In addition, we face considerable political instability due to U.S. federal elections in November. We’re likely to see this uncertainty ramp up as the political convention season kicks off this summer and we get closer to election day in the fall.
International risks remain as well. The ongoing war in Ukraine, continued conflicts in the Middle East, and China’s economic slowdown all have potential to cause further regional and global uncertainty that could spill over to the broader world economy in the second half of the year.
And, of course, there are always unforeseen risks that could negatively impact markets and affect the economic outlook in the months ahead.
Positive Outlook
Here’s the good news: Despite the risks, our outlook remains broadly positive. More moderate economic growth should help bring the economy back into balance in the second half of the year, with slowing job and spending growth set to help tamp down inflationary pressure. Stock market fundamentals are improving, and bond valuations are compelling. Risks certainly remain, but that is always true. And we’ve seen markets weather short-term risks well through the start of the year, so we remain optimistic as we kick off the year’s second half.
|