Recently, I had the opportunity to attend the 2024 Milken Global Conference in Beverly Hills and speak on a panel with a few of my esteemed peers about future financial conditions and the overall health of the U.S. economy.

We discussed how investors can safeguard against systemic risks while capitalizing on opportunities in increasingly polarized economic cycles, the impact of central bank action on consumers and businesses, and the effect geopolitics might have on economic strength in the next decade. Here are my key takeaways from our discussion.

Despite downwardly revised rate cut expectations, U.S. markets remain exuberant

Federal Reserve (Fed) language is playing a large part in fluctuating market sentiment. Last October, markets embraced Chairman Jerome Powell’s (premature) inflation victory dance, which inevitably loosened financial conditions, and is likely one of the reasons we saw sustained economic strength and associated upside inflation surprises in Q1. Again, during the April FOMC meeting, Chair Powell was clearly quite dovish and pushed back against fears of rate hikes, which re-incensed a bit of happiness into the market. Investors are clearly eager to cling on to even the smallest sign that rate cuts are coming.

Additionally, investors who are looking across the markets and the U.S. economy are seeing fundamentals— growth and earnings numbers— that are quite strong at the moment. This makes it easier to digest Fed language indicating that they might not get the additional tailwind of rate cuts as soon as anticipated this year. Ultimately, with such a strong U.S. economy, it makes sense that markets are doing well despite delayed rate cuts, and investors should be able to eke out further positive gains from here.

Geopolitics, such as re-shoring and elections, are too pushing inflation up

From a geopolitical standpoint, 2024 is the year of elections. Of course, there is a high-stakes presidential election happening in the U.S., but important elections are taking place worldwide. Historically, geopolitical events haven’t had sustained impacts on the market beyond a week or two. However, events that impact supply chains and oil prices are the clear exceptions to this rule, with ramifications that feed through to inflation—and what we're seeing today is the antagonism between countries is being targeted toward supply chains. That is a direct, economic, route for countries to battle with each other. As investors look out over the next 5-10 years, which is more likely, that geopolitical pressures are going to increase or fade away? Assuming that they will continue to play a part on the global stage, then that's going to continue to put upward pressure on inflation.

Although lower-income households and small businesses are bearing the brunt of higher-for-longer rates, the U.S. economy is likely to remain strong

One of the things that is emerging in the economy is a bifurcation between high-income & low-income households. As excess savings from the pandemic dwindle, lower-income households are starting to feel the impact of the Fed’s rate-hiking campaign. However, it is important to note that lower-income households aren’t really struggling anywhere close to what we observed before the Global Financial Crisis. Additionally, what continues to drive the U.S. economy are high-income households, who haven’t had to rely on excess savings and were able to refinance their debt at historically low levels before the Fed’s rate hiking cycle and are now benefitting from growth in passive income. There is a similar bifurcation emerging between large and small businesses, with large businesses more resilient to higher interest rates. So, there will be pockets of weakness, which are starting to show through in the lower-income household and small business space, but it is not yet enough to create a major warning sign for the economy.

In addition, provided the labor market is strong, consumers are going to be strong. Spending can generally be maintained provided a regular paycheck is being received. So, while there may be a few cracks emerging in consumer spending, continued robust labor demand should keep mortgage defaults and consumer credit card defaults from rising sharply. This is the reason why the Fed is so focused on the labor market currently It is unlikely to delay rate cuts for too long because it wants to maintain strong labor demand, ensure job losses do not spike and prevent significant consumer weakness.

Visit our 2024 Milken Global Conference landing page for session replays and for additional insights from myself and my colleagues.

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