Mid-Year Outlook 2024: Still Waiting for the Turn

LPL Financial Presents

A BRIEF LOOK BACK

The Midyear Outlook is an opportunity to revisit the forecasts we set forth in December 2023. In many ways, the views are the same, but with a bit more nuance. As we said last year, rate cuts “may not come until the latter half of 2024, and the magnitude may not be anywhere near as aggressive as markets think.” Indeed, this is still the case. As last year came to a close, the market’s expectations of numerous Fed rate cuts were overdone in our view because inflation was sticky, and consumers still had money to spend. As of now, the markets perhaps have swung to the other extreme, with some even chattering about potential rate hikes. Again, we believe this is misguided.

Further, we made the case that investors should have adequate equity exposure to protect against inflation. Domestic markets would outperform other markets, and we believed “the stock market [would] look past the negatives of a recession.” So far this year, equities have returned a handsome profit for those taking calculated risk.

But the previous statement reminds us of a potential miss in our expectations. As of the writing of our annual outlook late last year, we thought “the U.S. could experience…an economic contraction…but still outperform other markets.” One sizable miscalculation was the extent to which consumers, particularly wealthier ones, could drive the economic growth engine, despite high prices.

WE HAVE A DELAYED LANDING…BUT STILL A LANDING

Recent data on refinancing activity provides a clue on why the economy has experienced a delayed landing. The housing market often explains a lot of what is happening in other sectors of the economy, and this time is no different. Roughly one-third of mortgages were refinanced in the quarters following the pandemic recession of 2020.¹

And because of 2020's extremely low mortgage rates, these homeowners lowered their monthly payments, thereby increasing their disposable income. Other homeowners took advantage of healthy home equity and took cash out to support more spending. The incredible impact of such historic refinancing activity caught many, including us, by surprise. In addition to the oft-mentioned excess savings from stimulus and temporarily curtailed spending, improved household financial conditions from low mortgage rates kept the economy out of the doldrums.