Decoding the U.S. Economy's Resilience: A Q1 2024 Market Intel Report with Dave Alison | Episode 14

In this episode, Dave Alison reflects on 2023 and shares our Q1 Market Intel Report. We're peeling back the layers on inflation's retreat, robust consumer spending, and a labor market that's standing strong against the odds. Dave doesn't just share the hard numbers; he brings clarity to what these trends mean for the year ahead, especially with whispers of Federal Reserve rate cuts stirring the air. 

Armed with historical data that spotlights the stark contrasts in stock market performance after a rate cut during recessionary and non-recessionary times, Dave guides us through the labyrinth of the stock market's response to interest rate tweaks.

Lastly, as the presidential election looms over us with its aura of uncertainty, Dave dissects the potential impacts—or lack thereof—on the economy and your investments. This is your gateway to understanding the subtle yet significant shifts that could shape your financial future in 2024.

The three major themes discussed are:
👉 The state of the U.S. economy and what's ahead
👉 What the start of rate cuts could mean for markets
👉 The potential market impact of the presidential election

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The information provided in this presentation is not intended to be individual investment advice or legal advice.  The information provided is for informational and training purposes only.

Investment advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). For a detailed discussion of PCA and its investment advisory fees, see the firm’s Form ADV and Form CRS on file with the SEC at www.adviserinfo.sec.gov. The views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Transcript

Dave Alison: 0:12

Hello and happy new year. This is Dave Allison, founder and CEO of Allison Wealth Management, and I want to welcome you to our Q1 2024 Market Intel Report. In this report, we're going to discuss the three key themes that are on the minds of investors today, the first one being the overall resiliency of the US economy In 2023,. I delivered a market Intel report to start the year and I shared a statistic that the number of economists that believed that we were going to enter a recession in 2023 was at an all-time high. We had soaring inflation, the Federal Reserve was about to embark upon a very aggressive interest rate hiking campaign to try to curb inflation, and there was a lot of people that were quite negative on the outlook of the United States economy. Well, here we are in early 2024, looking back, and, of course, we saw that the Federal Reserve's battle on inflation is working. We ended 2023 at a core inflation of near 3% and, in the face of higher interest rates, we saw that US consumers kept spending, which really drove the overall growth in the US economy.

Dave Alison: 1:46

Of course, now our attention turns to can those trends continue into 2024? And I want to look at a couple data points, of course, of where the state of the US economy is today and, most importantly, what's ahead. As I mentioned earlier, inflation continues to come down and as long as we stay on that downward trend, that should lead to a healthy US economy. We saw retail spending continue to power the United States economy, producing good growth. But of course, as we all know, typically with the economy, the biggest risks to the economy often are the ones that we don't see coming. So there are some potentials that this picture could change. But as of right now, we see a very strong and healthy labor market. Consumer financial balance sheets seem to be pretty healthy, although we're starting to see a slight rise in credit card delinquencies. Of course, retail spending seems to be quite healthy, which overall, tend to lead to economic growth.

Dave Alison: 3:05

Now that turns our attention to our second key theme on the minds of investors today what happens if and when the Federal Reserve starts to cut interest rates. The FOMC is projecting a few interest rate cuts in 2024. You can see, based on the data on this chart, they are forecasting a year end interest rate of about 4.6%. Now the overall market is actually forecasting and anticipating a little bit more of an accelerated cut to interest rates. They are forecasting that interest rates start to be cut earlier in the year, potentially in the second quarter, and we actually end the year at about 3.6%. So again, a little bit of a variance between what the FOMC is projecting and what the overall markets are anticipating.

Dave Alison: 4:12

But what I want to talk about is what we've seen historically from the stock market if and when the Federal Reserve does start to cut interest rates. Now some people believe that the Federal Reserve will not start to cut interest rates until there's a certain level of pain felt in the economy. In this chart it shows the average stock market return over time when the Federal Reserve starts to cut interest rates. So what we've seen since 1965 is that on average, the stock market has actually produced a positive return of 5% from the 12 months following the first interest rate decrease. Now to contrast that kind of the tale of two stories here are that if the US economy goes into a recession, what we've seen is the stock market on average has delivered a negative 3% return in the 12 months following that first interest rate cut. But to the contrary, if the economy does not go into a recession, if we do experience that soft landing, then we've seen the market deliver, on average, about a 15% return in the 12 months following that first cut. So some things to be optimistic about if the economy stays resilient. And there is a stark difference in results during times where the economy avoided a recession throughout the 12 months following an interest rate cut, versus those when a recession did occur.

Dave Alison: 6:13

So that leads me to our third key theme on the minds of investors today, which is, of course, the presidential election. Many people have predictions on what could happen in the election and, of course, in the economy and the stock market, but the one thing to note is that there is very little correlation between what happens in the presidential election and what happens in the stock market specifically over the long term. Now we know the one thing that causes volatility more than anything else is uncertainty, and going into an election year, there is an incredible amount of uncertainty. What you can see in this chart that was put together by the capital group is that, leading up to the primaries, there is typically a lot of uncertainty in the markets, which creates volatility, but what you can see on this chart is, once a lot of that uncertainty starts to dissipate, we've got some more firm information after the primaries and, of course, we lead into the actual election in November, that volatility starts to dissipate and, in fact, it traditionally has termed positive for overall markets. And what you can see over on the right side of this chart is that market returns aren't truly correlated to the party in office. For example, if we look at a 10-year average of stock market returns, they are about equal whether a Republican was in office or a Democrat was in office. You can see the data here the average 10-year return of the stock market when Republicans were in office was just over 10.5% and the average return when Democrats were in office was just over 11%. So, again, no direct correlation to the party in office and the overall performance of the stock market.

Dave Alison: 8:23

While there is some uncertainty leading into this election year, we believe the best course of action is to invest in being prepared, not investing in predictions. Again, what we saw was 2023 was quite a humbling year for economists, for forecasters, for people who are trying to make predictions in the market and for those that stayed the course in their disciplined investment approach and followed their plan. They were rewarded, and we see that same theme playing out here in 2024. Now, that's not to say that there aren't events that could rattle the markets. Of course, some acute change in some of the geopolitical tensions that are out there could certainly rattle the markets, but again, we believe that, with all of the data that's available today, that the best course of action is continuing to stay the course, stay disciplined and not letting these short-term events drive uncertainty in your own financial plan. So again, we appreciate you joining us for our Q1 2024 market intel report.

Dave Alison: 9:44

And if there's anything we can do, please don't hesitate to reach out.

Speaker 2: 9:49

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