State of the Union: The Economic Environment and Its Market Impact


How did we get to this state of the economy?

COVID provided an ideal environment for inflation with both stimulus programs increasing the demand for goods while manufacturing and/or shipping delays reduced the supply. This “perfect storm” increased inflation significantly, and the consumer price index, which is the most widely used measure of inflation, ultimately peaked at 9.1% year over year in the summer of 2022. The Federal Reserve (the Fed) has a mandate to stabilize prices and to fight inflation. So, from February 2022 to July 2023, they increased the target rate by over 5% from effectively zero to a 5.25% – 5.5% target range. Along with other factors, this aggressive policy helped to bring inflation down to the 3% range by June 2023. Although inflation fears abated, the aggressive actions of the Fed meant that for much of 2023, market participants worried about a possible recession based on their association with past tightening cycles.

Is recession still a risk for markets?

Macroeconomic data has all but stamped out the recession fears that loomed over 2023, but inflation has become a concern again. The unemployment rate has remained below 4%, job openings are lower but are elevated versus history, and the consumer is still spending. Retail sales beat expectations in March at .7% and the Conference Board’s Leading Economic Indicators no longer signal a recession. The market rally from the fall of 2023 through March 2024 was most likely due to excitement over inflation falling and economic growth remaining strong (or a soft landing). But the market is now coming to grips with the fact that better economic conditions also mean inflation will likely remain higher for longer than predicted and the fed will probably keep target rates elevated for longer than expected.

As the CPI chart demonstrates, the headline rate stalled out around 3% in the middle of 2023. It seems that every time there is another higher-than-expected inflation report, the number of expected Federal Reserve rate cuts in 2024 drop further. As a result, the stock market in April returned some of the rally the year started with.

Source:  Strategas Research Partners, as of February 29, 2024

The stock market may be disappointed that rate cuts have been delayed, but in a scenario where the Fed feels compelled to cut rates, it would likely be associated with reduced economic growth, increased risk in the macroeconomy, and a possible recession.

The Presidential Election: How Does it Impact the Outlook?

Like in the past, there may be volatility around the upcoming election. Historically, the VIX (or the CBOE volatility index) often spikes around elections; however, that volatility usually subsides rather quickly back to average levels once the election season is over and uncertainty is reduced.

Past performance is not indicative of future returns. This should not be considered a recommendation to buy or sell any security.   Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested directly.

As is demonstrated in the chart above, over the past 30 years, the S&P 500 has averaged 10.4% per year, continuing its ascent regardless of the party in the White House. For example, the S&P 500 grew 16.3% annualized during the Obama administration and 16% during the Trump administration, which are both higher than the average of the last 30 years.

Investors that were guided by political opinion rather than a long-term investment plan may have missed out on those above-average returns. While government policies may have a strong impact on the macroeconomy and the stock market, the composition of political parties in power alone does not warrant deviation from a long-term investment plan.

Maintaining a Long-Term Investment Plan

Ensuring that our clients’ investment portfolios are aligned with their long-term goals is more important than trying to predict the election or the economy. By working as a team, we can remain patient, sticking to a well thought out plan through the inevitable ups and downs in the economy and markets. If you are interested in learning more about our investment strategy, please contact us today.


Please send your questions, comments, and feedback to: Any statement non-factual in nature constitutes only the current opinion of this author which is subject to change without notice. Certain statements are of future expectations and other forward-looking statements are based on management’s current views and assumptions. Any statistics mentioned have been obtained from sources we believe to be reliable, but the accuracy and completeness of the information cannot be guaranteed. Neither the information nor any views expressed should be considered investment, legal or tax advice, or constitute as a recommendation to buy or sell any security, strategy, or product. It should not be assumed that this is a forecast of future events or that any security transactions, holding, or sector discussed where or will be profitable or that the investment recommendations or decisions we make in the future will be profitable. Past performance is not indicative of future results.

We look forward to learning about your financial goals.