Summer 2024 Market Perspectives with Brett Carleton

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Greetings from the team here at Heritage. With our 248th Independence Day quickly approaching, it is important to reflect on the significance of the Declaration of Independence. No colony in the world's history had ever broken away from its governing country and gotten away with it. The only document more important than this would be the U.S. Constitution that was ratified in 1788. It is amazing the vision our founding fathers had, as our constitution is the second oldest governing document in the world and continues to withstand the test of time. At times, it can seem that we are so divided as a country, but it took the original thirteen colonies over a year to agree to the provisions, and several colonies demanded a Bill of Rights to protect their citizens from tyranny by the central government. Hopefully, you can get out and enjoy some good old American summer traditions this Fourth of July to celebrate everything our country represents. 

The United States was the first country to combine democracy with capitalism. Neither was a new concept, but just never implemented together within one country. The wealth this hybrid system has created is like no place ever before. On June 7th, the Federal Reserve announced that U.S. household net worth had ended the first quarter at an astronomical level of $160 trillion. Americans are sitting on $12-$13 billion in money market accounts, CDs, and checking accounts. During the first quarter of this year, Americans made $3.7 Trillion from interest and dividend payments. With elevated interest rates over the past 18 months, all we hear is how this hurts consumers with higher interest rates. There is little discussion on how savers are finally getting paid after two decades of low interest rates. In the past when we have seen elevated levels of cash, it typically finds its way into higher-yielding investments like stocks, real estate, or new business startups. Historically, this has been one of those leading indicators of future economic gains.  

We have seen U.S. equity markets continue to rally as corporations continue to report strong earnings despite higher interest rates. Corporate balance sheets remain strong with U.S. companies having more than $4.4 Trillion of cash. With all the hype around Artificial Intelligence (AI), some of the company’s stock prices may have gotten ahead of themselves, though AI has the same potential to change our lives just like the internet has over the past three decades. It will impact every business as AI will help to improve efficiencies in every industry and many other facets of our lives. With all the talk of AI replacing human labor with “robots,” I believe we will need even more people. Throughout history, when predictions have been made on the demise of human labor, employment has continued to grow. Employment remains strong, as one of the challenges businesses are facing today is finding people. It may require retraining some of our labor force, but the opportunity is immense.  

It is so interesting to look back over the last 30 months and see how wrong the economic forecasts have been. Almost every economist was calling for a recession as early as 2022, with The Federal reserve raising interest rates as aggressively as they did to try and get a handle on inflation. My belief now is we may see The Fed lower interest rates from current levels, but we are not going back to the levels seen during the pandemic. This is all part of the process of getting back to a more “normal” monetary policy. The money supply is finally back to a level that would have been considered normal after the explosion of supply during Covid. The last step in the process of normalization post-Covid will be getting government spending back within manageable levels. With higher interest rates, the cost of carrying the U.S. debt has now exceeded $1 trillion annually and this will impact all our government programs.  

This year being a Presidential election, history would suggest that we should be experiencing elevated volatility in the equity markets. So far, we have had an almost 5% drop in equity prices during March, but nothing approaching the 14% average drop in equity prices experienced in a “normal” year. Having said that, I think we can all agree this is going to be a unique election, and it would not surprise me if we did experience more volatility before this is all settled. 

Please share any questions or comments you may have. We always enjoy hearing your thoughts.

Brett S Carleton, CFP, ChFC