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After some high inflation readings early in the year, it appears that inflation is easing toward the Fed’s target.While it may reach that target this year, if inflation continues this path, the Fed could start scaling back its restrictive monetary policy and lowering interest rates. It appears this could happen as soon as September, and while cutting rates by 0.25% won’t make that much of a difference in the grand scheme of things, it is a signal to investors that the Fed has gone from being a foe to being a friend.

Equity markets have been riding the AI optimism tailwind though, so it isn’t obvious how much more of a tailwind lowering rates could provide. Stock market indexes have been largely driven higher by only a few large technology stocks that make up a growing percentage of the S&P 500. Lowering rates could provide a tailwind for the rest of the stock market that hasn’t gone up as much, such as value and small cap stocks. We do think there will be volatility along the way as the economy cools and the labor market moderates. Overall, the economy is still on solid footing, and investors have a lot of cash in money markets and bank accounts that could provide support in the event of any market pullbacks. Bonds seem relatively attractive and could offer diversification benefits to help mitigate stock market volatility.

While 2024 is an election year and there will be a lot of noise attached to politics, our analysis of past election years shows that stock markets were up over 10% on average in post-World War II era election years. Elections matter, but they tend not to influence stock returns. Both Joe Biden and Donald Trump have been president before, so that also takes out a lot of the uncertainty around this election.

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