2024 Q2
Over the past few weeks, the summer heat has overtaken us here in Cincinnati, not unlike other parts of the country. For those of you with a green thumb, you know what this typically means for your outdoor plants – more stress, more water, and more care to help them through this time. However, I am still amazed at the resiliency of many plants when bombarded by full sun and high temperatures. Now for some of you, you have already spotted my transition.
The resiliency of the economy is still front and center of the economic conversation. Even with the pressures of sticky inflation, slowing retail sales, geopolitical instability, and higher interest rates, the economy is forging ahead. As a side note, while retail sales have been slowing, sales are outperforming expectations mainly because of higher wages. As well, the stock market, after a decline in April, is establishing a run at new highs again. To round this out, the Fed earlier this quarter basically stated that they could not see a clear path for inflation to decline enough for them to feel safe to lower short-term interest rates.
Looking ahead, we believe there could be an economic slowdown on the industrial side of the economy as we approach the end of the year, however, we expect this contraction to be mild in nature. The service side of the economy is in better shape, and while it too will go through its bottoming process, we do not see a recession in store for it. Inflation should continue to slowly come down as we progress through this year and into the first part of next. This may give the Fed an opportunity to cut rates, however, no one is talking about the next round of inflation looming ahead around mid-2025.
The main culprit for this inflation will be tight labor conditions leading to higher wages, and increasing government debt funded by fiscal policies no matter who wins the White House in the fall. Some of you may remember that we wrote about inflation coming, way back in 2018, and that the Fed needed to get in front of it before inflation infiltrated the labor markets.
The Fed did not, instead declaring the now infamous “transitory” line. Adding to the inflation pressure will be sticky energy prices. As a nation, we are at full electricity generation – there is no excess capacity. As artificial intelligence continues to gain traction in the years ahead, it will require more and larger data centers which require tremendous amounts of electricity to operate. Coupled with the industrial part of the economy, which may accelerate next year, we believe that energy will be stretched and keep prices elevated.
With all this being said, as we look forward, we see growth in the economy in 2025 and even through 2026. We forecast rising retail sales, increasing industrial production, low unemployment, and higher wages. This should bring a boost to overall economic growth.
Will the election impact any of this? Typically, not. If someone were to ask me to rank in order those items that I believe would impact our economy, elections would be near the bottom of that list. While they may cause short-term fluctuations because of headline risk, they generally do not have longer-term economic and market impacts.
As for the stock market, while we may see increased volatility, we have benefitted from the resiliency of the economy as markets hit new all-time highs. We adjusted the portfolios during this past quarter and will continue to make additional adjustments in the third quarter as we make our way through this economic transition. We are very pleased with how the equity and fixed-income pieces of the portfolios are performing.
If you have any questions, please do not hesitate to contact our office, and as always, we thank you for your trust
Marc Henn, CFP®, CEO & Founder