2024 Midyear Outlook: What Goes Up Must Come Down?

Brad, Sam, thank you so much for joining me today. I wanted to talk to you a little bit about what we're hearing from our advisors. I know how much they value really being able to access the entire team of economists, portfolio managers, and analysts. I'm curious, what are some of the prevailing questions and the overarching concerns that you are getting when it comes to the U.S. economy? Karen, I think you're absolutely right. One of the real advantages that Commonwealth offers is we offer direct access to all advisors— to everybody on the team. Whether it's Sam or yourself or me or whomever, advisors can contact us directly and actually ask us whatever they want to. And because of that, we do have a pretty good sense of what's going on. And I think you won't be surprised to learn that the one thing that we're hearing more than anything else at this point is, “What's going on with inflation?” You know, what is happening? Is it going to get better and what is that mean for markets? And when we get to inflation, of course, I hand it over to Sam. You know, from my seat as the director of fixed income research, you can imagine that inflation and interest rates are top of mind with a lot of the conversations I have with our advisors. And I'd say when you're talking about where we're going with inflation, it's important to look not only where we are, but where we've been as well. And in order to do that, you really have to go back a couple of years to the summer of 2022, when inflationary pressure peaked for consumers at just over 9 percent on a year-over-year basis. Since then, we've made tremendous progress in getting inflation down and now sit at about three and a half percent on a year-over-year basis. However, that's nowhere near the Federal Reserve's 2 percent target. So looking forward, I think the Federal Reserve has made it abundantly clear that they remain both willing and able to fight inflationary pressure primarily through higher-for-longer monetary policy, and I expect that to continue in the immediate future. There is no doubt that there are a lot of factors that are impacting both the economy and markets. We talked about inflation. We know about the high interest rate environment. We've got an election coming up. And, of course, there's a multitude of geopolitical risks. What are your thoughts on the ability of the U.S. economy to remain strong and stable? Karen, I think the one thing that has surprised everybody over the past year or two is just how strong the U.S. economy has been. With everything that you've mentioned— with the geopolitical shocks, with the almost unprecedentedly rapid and large increase in interest rates, with the inflation we haven't seen in decades. Nonetheless, we've seen the economy continue to grow. And I think we have to look at why that is when we think about where we're going. I would argue that what has made the economy so successful, so far, has been that job growth has been and continues to be incredibly strong. We're actually seeing job growth run faster than it did before the pandemic, when it was already pretty much in a boom time. We're seeing wage growth go from strength to strength. It's running above inflation. We're seeing real wage growth, which is something that has been relatively uncommon in the past. So you have more people working, they’re making more money, and even with the inflation, we're still beating inflation. What that means is when the American worker has money to spend, they spend it. And with the economy being over 70 percent the American consumer, that means as long as the consumer, as long as the workers are doing well— and they are— the economy is going to keep growing. And we don't see any real changes to that going forward.