By Tim Courtney, Chief Investment Officer

Amid the final stretch of 2024, three key factors remain at the center of our attention: Gross Domestic Product (GDP) growth and broader economic data, U.S. fiscal discipline and market concentration. These were the same focal points we discussed back in July, but with new developments over the last weeks and months, it is worth revisiting.

GDP Growth and Economic Data: Throughout 2024, it’s been our view that the economy is slowing, and that view continues to hold. As is usually the case in the economy, there are several noisy indicators and contradictory measures — some pointing to strength, while others are showing signs of weakness.

The Federal Reserve (Fed) has been hitting the brakes for quite some time now, starting with interest rate hikes in late 2022 and into 2023. This, combined with a decline in the money supply over the same time period appears to have brought down the inflation fever but with the side effect of slowing growth and hiring.¹ There have been large downward revisions of hirings, all within the private sector, with a large percentage of new jobs over the last year being in government, education and healthcare.²

U.S. Fiscal Discipline: When it comes to fiscal discipline, not much has changed since last quarter. It remains a persistent concern, with the U.S. government now spending more than $1 trillion annually just to service its debt.³ Thankfully, the U.S. continues to benefit from the strength of the dollar and the market’s willingness to demand dollars and lend to the U.S. Still, the cost of this borrowing is rising.

We also have a presidential election around the corner and are going to see whether we’ll end up with a unified or split government. Historically, a split government — where different parties control the White House and Congress — has led to policy gridlock, which the market often views as a positive. We will be looking for guidance on the fate of the Tax Cuts and Jobs Act of 2017, set to expire in 2025,⁴ and government spending.

Market Concentration: One of the defining characteristics of the market over the last 18 months has been the dominance of a handful of mega-cap stocks, particularly in the AI space. Companies like Microsoft, Nvidia and Apple have seen outsized gains.⁵ This has created a concentrated market that is overly reliant on a few names. The excitement around AI has companies investing heavily in order to keep up with competitors, but we are still waiting for implementation and promised results. In Q4, we’ll be watching closely to see if AI investments begin to deliver.

It's also worth noting that markets outside the U.S. have performed well. Since March 2020, earnings growth in Europe have equaled that in the U.S. (7.5% annually), though prices in the the U.S. have significantly outpaced those in Europe (130% increase compared to 80%).⁶

We will continue to monitor these key factors as we look ahead to the rest of the year. As always, diversification is critical to navigating whatever challenges and opportunities lie ahead. If you have any questions about your portfolio or the broader market, don’t hesitate to reach out to your Exencial advisor.

Sources:

1. YCharts (data as of 9/16/24) – US Inflation Rate (I:USIR)
2. CNN.com – (8/21/24) New data shows US job growth has been far weaker than initially reported
3. The Heritage Foundation (3/11/23) – Ignore Soaring Federal Debt All You Want, but You’re Paying for It
4. Tax Foundation (4/25/24) – Why Are the Individual Tax Cuts Expiring?
5. CNBC.com (6/2/24) – Nvidia dominates the AI chip market, but there’s more competition than ever
6. CNBC.com (data as of 9/17/24) – MS EAFE Index Comparison with S&P 500 Index

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