Ameriprise Financial Services, LLC’s Post

Transcript

Hello, I'm Anthony Saglimbene, chief market strategist at Ameriprise Financial. Overall, the first half of 2024 started on a generally strong note for both the markets and the economy. To help you make sense of what could be in store for the second half of the year, I have a great panel of experts with me to share their insights. First, I'd like to introduce Russell Price, chief economist at Ameriprise, and Brian Erickson, fixed income strategist at Ameriprise. Thank you both for joining me. Russ, I'd like to start with you. In your view, how did the U.S. economy perform in the first half of 2024? And can you provide an overview of the key indicators that you're watching for the second half? Sure, Anthony. So the pace of economic activity did slow a little bit in the first half of this year, but that's okay, in our opinion. Comparatively to last year's second half, when the U.S. economy grew at a real rate of about 4% over the second half, we slowed down to a pace in the first quarter of 1.4%. That's an annualized growth with inflation subtracted and we expect it to improve somewhat to about two, two and a half in the second quarter. Those slower rates are closer to what the U.S. economy can achieve without generating significant further inflation pressure. But they're also strong enough as to where we don't see them as likely to contribute to any further upside in the unemployment rate. Significant upside that is. So it's a decent pace that we're likely to continue to see. So in the second half of the year, we see the pace being about 2 to 2 and a half percent for real gross domestic product, which is the overall pace-- measure of overall activity in the economy. And that's a good, decent rate. And that's a rate that we think can be sustained for some time and even into 2025. What measures we're looking at specifically, aside from looking for further improvement in the rate of inflation, further downside that is in inflation? Is consumer financial health. Consumers are still in good financial health, in our opinion. That's paramount to the economic outlook at any given time, given that consumers are almost 70% of economic activity. And in our view, consumers are in good financial health today, and we expect that to continue for quite some time. Hey Russ, just kind of thinking about a follow up question, I know, you know, after two years of speculation, it seems like a recession fears have kind of faded. Yet consumers may not feel, at least based on consumer sentiment, they may not feel like the economy is strong right now. How do you make sense of that disconnect? Yeah, Anthony, I think what it is is that the inflation pressures are continuing to weigh on consumers, even though the rate of inflation. In other words, the rate of price increases has subsided significantly. It's still a situation where prices are not coming down in most segments and that higher price level is weighing on consumer sentiment and confidence and likely will continue to do so for a few more quarters at least. Again, we expect to see further improvements in inflation, further downside. So that should wane over time. But Anthony, let me turn the discussion back to you and the financial market side of the equation. The first half of the year looks to have been quite good for stocks. What drivers for stock prices are you watching for the second half of the year and what's the likelihood that we might see an increase in volatility as we get closer to the presidential election? Thanks, Russ. Clearly, the first six months of this year have gone to the bulls. You have major U.S. stock averages like the S&P 500 and NASDAQ composite hitting numerous fresh highs this year. But what I what I see is is really a tale of two markets. There's a handful of stocks and big tech companies that have very clear, visible secular drivers around artificial intelligence or areas of technology where investors are very comfortable with the profit outlooks for these companies improving over the course of the next couple of quarters. Hence, that's why you've seen these stocks lead markets higher and their price to earnings ratios really move higher. The other 480 or 490 stocks in the S&P 500 really haven't done anything. And that's because there's less confidence about the profit outlook for things like consumer staples and financials and industrials and materials. These are areas that are more sensitive to what's happening in the economy. So they're more sensitive to interest rates and demand drivers around growth and inflation. And so as we approach the second half, our view is that we could see more of these types of companies participate in the stock rally. And you mentioned a positive growth environment in the second half. If that's true and we actually see that, then the expectations around profit growth for a much broader set of companies and sectors in the S&P 500 may come to fruition. And if it does, the valuations of these companies are more attractive. Let's say then that some of the big tech stocks that have really moved higher. And so I think that theme is really what markets and investors are going to want to watch for in the second half. Our view and based on some of the kind of comments around the economy, is that corporate profit growth should improve in the second half. Interest rates should lower and we could see inflation and monetary policy be a little bit more supportive at those conditions come to pass. Then I think markets can move higher in terms of volatility and around the election, markets can see a 10 to 15% drop at any time for any reason. Historically, during election years, market volatility tends to increase about 60 days before the election, but then it ebbs lower back to normal once those election results are known. And our view is that if we do see divided government, then I think markets will look to those more fundamental factors that drive growth in markets, in the economy, and that's the level of profit growth, that's the level of interest rates. It's monetary policy. These are the things that are likely to drive markets higher or lower in the second half. However, we have a favorable view for the market as we get to year end. Which brings me to a question for you, Brian. Investors have faced a lot of interest rate volatility in the first half of the year. Maybe talk about what has driven some of that volatility and then what's your view for the the rate path in the second half of the year? Well, I think that one of the biggest contributors to volatility this year for broader yields and rates and fixed income, it's been the setup coming into 2024. In the fourth quarter of last year, we had yields rally from very high levels to remarkably low levels over 100 basis points in that first-- in the fourth quarter. What that did is it set this year up for kind of a price to perfection kind of environment with the Fed shifting from from automatically cutting rates by 100, 150 basis points, which is what we've priced in the market at the end of last year to maybe they're going to wait for longer and stay in, stay steady and remain high for longer. What that ultimately does is it puts the market up somewhat on pause. And so with that, as a result of that, we have seen yields rise up, move a little bit higher in fixed income. They rose during the first quarter, moved a little bit higher into second quarter and have kind of returned back to where we ended up at the end of the first quarter. So as far as entry points go, we're we're really kind of reset at attractive levels relative to of last year and we're still seeing attractive real yields available for fixed income investors. You know, near the highest levels that we've had in 20 years. So investing in fixed income, this is a great environment for buying fixed income and in particularly high quality fixed income. The last thing is just kind of thinking about where we stand today for cash yields. I know a lot of investors are focused on where cash yields can be attractive today as we see heading into the back half of the year with yields moving lower again, the opportunity to move out of cash yields is available today and that is going to become less attractive as time goes on. So you're going to miss out not only on the total return performance of your fixed income allocation, if you have assets that are additional assets that are stuck in cash, but you're also going to miss the opportunity to lock in on the higher yields that you can have in your fixed income portfolio over time. So now's the time to kind of retune to high quality fixed income assets. Thank you, Brian. Really insightful perspective. Some great takeaways for investors as we start the back half of the year. With that, thank you to my colleagues, Russ and Brian for joining this conversation and thank you to our clients and other viewers for watching. If you have questions about current market conditions or would like to receive additional timely insights from the Ameriprise Investment Research Group, please contact your Ameriprise financial advisor. Thank you.