A Plunge in the Market Has Investors Bracing for a Turbulent Year in 2024

Stocks are in a steep decline. The Nasdaq 100 has entered correction territory, and unemployment is climbing. Furthermore, the anticipation for Federal Reserve rate cuts in September is being overshadowed by growing worries about the overall health of the US economy.

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The recent period of market stability started to unravel on July 24th, when the S&P 500 experienced a drop of over 2%, something that hadn't happened in 17 months. Following the largest two-day selloff since March 2023, market anxiety has significantly increased. Critics argue that the Fed delayed too long in cutting rates, and weak earnings from technology companies, which had been leading the market rally, are adding to the concerns.

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The addition of geopolitical tensions and a tumultuous US election, likely between Donald Trump and Kamala Harris, has heightened retail investors' anxiety as the year progresses.

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We consulted four investment experts to get their insights on key market issues and how investors should position their portfolios in the coming months. Here’s what they had to say:

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Rate cuts: Historically, the onset of rate cuts has been detrimental to stocks. However, it's essential not to rely solely on historical patterns, as the current backdrop differs significantly. Typically, the Fed cuts rates in response to a recession, characterized by falling inflation and widespread job losses. This is not the scenario we face now.

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If the Fed cuts rates in September and manages to achieve a soft landing, equities could continue to perform well. However, if the cuts are delayed, leading to an economic slowdown, equities might struggle.

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Tech: The market is undoubtedly concentrated and vulnerable to a tech sector pullback. While the tech sector is influenced by the macro environment, these companies possess strong liquidity and high quality. They are at the forefront of growth and productivity globally, not just in the US.

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There are segments within the market that still offer potential, such as small-cap stocks, which are currently performing well.

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The election: A Republican victory could benefit small-cap companies, which would gain from trade tariffs. Conversely, multinationals with significant revenue from outside the US would likely suffer.

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Bond yields are another area to watch. A new administration's tax cut announcements could push bond yields up, but there is less fiscal space compared to 2016, limiting significant spending increases.

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Higher trade tariffs and greater fiscal stimulus would drive inflation. A Republican-controlled Congress and presidency would likely lead to rising bond yields due to anticipated inflation from reduced fiscal discipline.

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In contrast, a Democratic victory might result in a less favorable immediate market reaction. However, from a fiscal standpoint, lower bond yields could boost equities, and the Fed might have more leeway to cut rates. A mixed government could result in reduced spending plans and lower volatility.

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Rate cuts: The Fed has ample justification to begin cutting rates. Equity markets are reacting to weaker economic data by reviving hopes for Fed cuts, though the bond market has yet to price this in. The current market narrative is a mix of Fed cuts and the Trump trade, which are almost opposing forces.

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Economic data show minor cracks, suggesting a perfect soft landing scenario, which the markets are pricing in. The challenge is the potential shift to where bad news actually becomes bad news. From an investment perspective, bonds present a significant opportunity since the cuts aren't fully priced in yet.

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Tech: Some tech sector weakness stems from high expectations before earnings season. Comparisons to the late 1990s are frequent, but current earnings are substantially higher than other market sectors. Fundamentally, the tech sector remains strong, though prices may have surged ahead of reality.

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The election: Too much emphasis is placed on potential political outcomes affecting markets. Both administrations would inherit a slowing growth environment and continue expanding the deficit. Despite concerns about tariffs and inflation, there was no significant inflation when tariffs were previously imposed on China.

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Much of the Trump trade has already been priced in, similar to 2016. We would underweight small caps in favor of higher quality. Earnings are simply not there to support the small-cap sector.

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If the odds shift towards a Democratic candidate, there could be a return to focusing on market fundamentals rather than political narratives.

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Anthony Roth, Chief Investment Officer, Wilmington Trust Investment Advisors

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Rate cuts: We believe the economy is in a strongly disinflationary phase, with the Fed's 2% target achievable by the end of 2025 without entering a recession. This could lead to positive economic growth, even at the trough of the cycle, which is unusual.

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We recently increased our overweight in small-cap stocks. Lower interest rates make it easier for smaller companies to finance their operations, and small caps are more dependent on financing than large caps.

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Tech: It's crucial not to underweight big tech. Despite corrections, these stocks perform strongly over long periods. We are overweight large caps, equally split between the leading seven S&P 500 companies and the rest. We see other sectors, such as financials and discretionary, catching up, particularly among quality companies.

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The election: A Democratic win might result in continued deficit spending and federal debt, impacting long-term Treasury markets.

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A Republican win could bring damaging policies like extensive tariffs and restrictive immigration policies. However, the impact depends on whether these policies are implemented in a nuanced manner that balances economic and political goals.

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A Trump administration limiting illegal immigration while expanding legal immigration for skilled labor would be beneficial. Broad tariffs with many exceptions could also be less harmful than feared.

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Rate cuts: I ended my S&P 500 longs on July 2 after two years, anticipating two risks: significant growth deceleration beyond what Fed cuts can address and political volatility keeping bond yields high, preventing a soft landing.

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Tech: Big tech and AI are currently overvalued. The monetization of AI remains uncertain, and current investments in big tech might not yield expected returns.

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The election: A divided Congress could constrain a President Trump, reducing market focus on politics and emphasizing macro fundamentals.

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A Republican sweep would lead to pro-growth policies, but the economy may not need more growth or inflation. Unlike 2016-2017, even a mild bond selloff in a slowing growth context might not be welcomed by equity markets.

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A Democratic hold in the White House likely wouldn't produce a hold in the Senate, resulting in a divided government. Investors should focus on macro fundamentals rather than political narratives in such a scenario.

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