3 essential truths for 2024’s second act

It’s never really “quiet” when you’re talking about the markets and economy, but the rest of this year has the potential to be louder than average. Keeping your equilibrium might get challenging. Remember these three things if you start feeling the need to make a change to your financial plan.

1

Political rhetoric is just that

Political promises will be flying left and right as candidates fight for votes. But talk is free, and there are a lot of hurdles on the journey from campaign promise to actual policy.

Just like you wouldn’t build a house on sand, you don’t want to make plans based on speculation.

The looming election may also cause additional market volatility – that’s simply the usual reaction to uncertainty. We expect those jitters to settle down once the election is over. Rest assured that one political party doesn’t have a monopoly on good market outcomes. After all, money is green, not red or blue.

2

The economy and the stock market are different things

Economic news, including interest rate changes and inflation numbers, will continue to be a big attention-getter for the rest of 2024. At this point, we have no idea whether the news will be good or bad. But don’t make the mistake of equating the health of the economy with the health of your portfolio. While they’re related, they don’t move in lockstep.

Economic indicators reflect what’s currently happening. (Actually, they’re somewhat backward-looking because the period they’re reporting on is already over.) They tell us what it costs to borrow, how many people have jobs, and how prices are changing right now.

Markets measure how much investors are willing to pay for the future promise of stock and bond returns. And as such, they’re forward-looking; they reflect the industry’s predictions about what might happen – is there trouble on the horizon or a strong, healthy economy? (Remember, sometimes these predictions are right, and sometimes they’re not.)

They both move in cycles, but those cycles don’t usually coincide

The stock market, of course, rises and falls through bull and bear markets. And the economy goes through high growth and slow growth or recessionary periods.

There is a relationship between market and economic cycles, but they’re frequently not concurrent – Russell Investments found that, on average, the market hits a high (and begins declining) five months before a recession begins, and research from investment firm Schroders showed that the market then bottoms out an average of five months before a recession ends.

Market expectations drive this relationship. As economic growth starts to slow, investors begin to predict an economic downturn and sell stocks. A dip in the economy typically means lower corporate earnings, so stock price declines happen in anticipation of those future lower earnings. By the time economists confirm a recession, the markets have already reacted. On the other hand, investors often begin buying stocks again as soon as they see a recovery ahead, driving the market back up before the recession is over.

But that’s just the general, high-level pattern. To illustrate the variety of ways the markets and the economy can intersect, here are a few recent examples:

In the early 90s, stocks began falling shortly before a slowdown began and hit a bottom early on, more than recovering losses before the recession ended.

When the dot-com bubble burst, stocks turned down well before a recession was declared and kept going down for quite a while after it ended.

As the global financial crisis began, stocks turned negative at nearly the same time the recession began, then began recovering shortly before it ended.

Source: S&P Dow Jones Indices, Bloomberg. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not a guarantee of future results.