Daunting challenges face the stock market for the rest of 2024—from high interest rates and stubborn inflation to rising geopolitical tensions around the globe and a US Presidential election dead ahead. But top economist Allen Sinai says investors should keep the faith. He believes resilient US economic growth, strong consumer spending and low unemployment can fuel the current bull market in stocks for the rest of this year and for much of 2025.
You would be wise to heed Dr. Sinai’s forecast—his calls have been remarkably prescient since the COVID-19 pandemic. Two years ago, he was one of the very few voices that correctly predicted there would be no recession, and he told Bottom Line Personal readers to position their portfolios for a multiyear stock market rally.
Here’s why Dr. Sinai thinks the economy will continue to show vigor despite all the uncertainties…what it means for your investments and finances…and what he sees ahead…
No Interest Rate Cuts
This Year
Investors were betting on a “soft landing” in 2024—in which high interest rates slow the economy and cool down inflation. That gives the Federal Reserve the flexibility to pivot and sharply cut short-term interest rates—expectations ranged from three to six cuts this year—to stimulate growth enough to ward off a painful recession.
Surprising good news: The US economy isn’t about to land at all. Despite the highest short-term interest rates in two decades and skyrocketing credit card rates, the expansion continues. The US gross domestic product (GDP) grew in the first three months of this year at an estimated annual pace of 1.6% but actually was stronger with real final sales to domestic buyers (which is GDP less inventories and net exports) at 3.1%.
One reason the economy is in solid shape is vigorous consumer spending. Retired and retiring baby boomers are the richest generation of senior citizens in US history, spending on service industries such as health care, air transportation, hotels and leisure.
Another reason is the red-hot labor market. The unemployment rate has remained below 4% for the longest stretch since the 1960s. A surge in immigration has increased the labor force, jobs and persons working, at a time when service industries desperately need workers to meet demand, and they are willing to pay them a higher minimum wage and increased compensation.
Finally, data shows robust capital spending by businesses on what I call “Big T”—technology that has led to a boom in worker productivity. The most obvious example is artificial intelligence systems that instantly synthesize information and automate tasks in many industries. But Big T is also high-speed video conferencing that allows employees to work seamlessly from anywhere, save money, move money, and spend on things like travel and living costs, as well as apps that allow small-business owners to boost output and incomes.
Surprising bad news: I don’t expect the Fed to cut interest rates at all in 2024 because inflation remains high. At the beginning of the year, I warned that it is hard to stamp out inflation once it becomes endemic in the system. The inflation genie is out of the bottle. After peaking at 9.1% in 2022, the inflation rate came down steadily, but progress now has stalled in the 3%-to-3.5% range. That is still well above the Central Bank’s 2% target goal, which is considered the sweet spot between consumer comfort and the economy’s ability to operate on an even keel. Federal Reserve chairman Jerome Powell believes “higher for longer” interest rates can continue to put downward pressure on demand and cool rising prices without a big rise in unemployment.
What this means for investors: I think stocks can continue to rise even without the help of the Fed as economic growth boosts corporate profits and helps companies overcome the drag of higher interest rates. A 3%-to-3.5% inflation rate may turn out to be a sweet spot for company earnings. High prices mean higher sales revenues for businesses, especially those that are getting more productivity out of workers, lowering their costs and boosting profit margins. While most of the stock market’s 2023 gains were concentrated in a few stocks dubbed the “Magnificent Seven,” I expect the rally to broaden to the rest of the market, which is still moderately priced. The bull market in equities remains.
Careful: I expect market volatility to increase as the economy and labor market weaken next year and when the Federal Reserve starts to initiate rate cuts. If the Fed can pull off a soft landing, the bull market could continue into 2026.
Three Potential Wild Cards
I’m forecasting just a 10% chance of a recession in the next 12 months. While the US Presidential election will be contentious, it should have limited effect on the financial markets because both candidates’ economic proposals are well known. Post-election new policies and programs take a long time to play out. But investors must be vigilant about other potential risks that remain contained for the moment but could rapidly escalate, triggering economic slowdowns and spelling trouble for stocks. These risks include…
Accelerating inflation. If the inflation rate spikes up to 4% or 5% in coming months, the Federal Reserve has indicated a willingness to raise short-term interest rates beyond the current 5.25%-to-5.5% range. Such a move would create a financial crunch for many companies and consumers and set the clock ticking for the next recession.
Winds of war. The direct military exchange between Israel and Iran has raised geopolitical tension in the Middle East to its highest level in decades. If the US gets pulled deeper into the regional conflict and/or there is a shutdown in the Strait of Hormuz from the Persian Gulf, through which 21% of the world’s daily oil supply is transported, it would raise oil prices, elevate inflation and hurt US corporate profits.
Hemorrhaging federal budget deficit. The US government currently is running a $1.1 trillion deficit. It costs about $700 billion annually just to service that debt. The Congressional Budget Office projects the US deficit will be 5.6% of GDP this year, up from 4.6% in 2019. I expect it to be worse! I do not expect budget reform in an election year, but failure to address the problem in 2025 could drive up inflation and interest rates.
KEY ECONOMIC MEASURES
Here’s what I expect…
GDP: I am forecasting full-year GDP growth of 2.5% in 2024 and 1.5% in 2025. Economic growth is being supported by solid consumer spending, business capital spending on Big T and government outlays. Consumer spending will rise 2.7% by the end of 2024 and could be solidly still rising by 2% to 2.5% in 2025.
Unemployment: The red-hot job market will start to soften this year with the unemployment rate rising to 4.3% by the end of 2024 and 4.7% by the end of 2025—still relatively low versus historical comparisons. But wage growth will pick up and stay ahead of inflation, rising in the 4%-to-5% range by year-end 2024.
Inflation: As measured by the Consumer Price Index (including food and energy), I expect the inflation rate to hold steady and end the year at 3.2% in 2024, followed by a drop to 2.5% by the end of 2025.
OUTLOOK FOR STOCKS
I’m forecasting that the Dow Jones Industrial Average will rise to over 41,500 by year-end 2024, up 14% for the year. The S&P 500 could hit 5,600, an 18% gain. These advancements will be driven by a solid 10% rise in S&P 500 corporate profits for 2024 and 7% in 2025. From an historical perspective, stock valuations are moderately elevated with a forward price-to-earnings ratio (P/E) of about 20 versus the long-term average of 17—high but not out of line.
Best stock sectors now…
Health care. More than four million Americans will turn 65 this year, and that surge will continue through 2027. Seniors are driving the need for everything from biopharmaceuticals to orthopedic hip and knee replacements.
Consumer Discretionary. Americans are spending most heavily on services such as restaurants, hotels, leisure and travel.
Technology (Big “T”). Signs of speculation in this sector abound. Investors must be mindful of valuations and stick with tech firms offering solid earnings and reasonable P/Es. But Big T is a big wave!
Technology (Big “T”). Signs of speculation in this sector abound. Investors must be mindful of valuations and stick with tech firms offering solid earnings and reasonable P/Es. But Big T is a big wave!
Sectors to avoid now…
Financials. Many regional banks continue to have heavy exposure to underperforming commercial real estate.
Housing and related. High interest rates and tight bank lending standards continue to put pressure on the housing industry. I expect mortgage rates to rise near 8% by the end of 2024, which will put a damper on sales of residential homes.
OUTLOOK FOR BONDS
Hopes for a bond-market rally this year will be dashed by the Federal Reserve’s delay in cutting interest rates. I’m expecting the benchmark federal funds rate to remain unchanged at 5.25% to 5.50% through year-end. That means the extended bear market in bonds continues in 2024. Total bond market returns are likely to be flat to slightly negative. Long-term bonds look particularly risky because the yield on 10-year US Treasuries, which began the year at 3.95%, is forecast at a much higher 5% by year-end 2024.
A “higher for longer” rate environment is a boon for savers and seniors on fixed incomes because their cash will continue to benefit from risk-free 5%+ yields in money-market funds and shorter-term US Treasuries through the rest of the year.
