Even with company earnings on the upswing and Wall Street buzzing about the Federal Reserve curbing interest rates, some stock market investors are still on edge.
On the plus side, the S&P 500 is up 18.8% year to date through July 16, an encouraging number at the halfway point of 2024. The index is also up 7.4% since the beginning of June, reducing any talk about a summer swoon for stocks.
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The 2024 presidential election is also in full swing, as President Joe Biden’s nomination hangs in the balance and Republican nominee and former President Donald Trump prepares to address party convention-goers after surviving an assassination attempt. Historically, presidential election years have delivered robust returns for stock investors, with some credence to the notion that elected officials don’t want to upset Americans headed to the voting booth. They tend to set short-term economic policy accordingly. But if recent events are any indication, this is clearly not just any old election year.
Additionally, COVID-19 has faded, taking with it pandemic-related supply chain shortages and business closures, which is all good news for a bull market that launched in October 2022. Yet consumers remain concerned about high product and service prices and a frozen U.S. real estate market, as well as endless (and expensive) wars in Ukraine and the Middle East, sky-high government spending and a lukewarm job market.
Throw all those issues into the pot, and you have a market that wants and expects to move forward when key economic indicators turn upward for the long haul. If they take a turn for the worse, the end of 2024 could bring toxic news to market watchers nervous about an economic collapse.
“The state of the U.S. stock market in 2024 presents a mixed picture,” says Nicholas Scibilia, founder and CEO at Orbit, an investor social platform based in New York. “One way to view the current state is that the market has shown resilience and growth, driven by strong earnings, technological industry disruptors like AI and increased consumer spending.”
On the flip side, Scibilia cites “general concerns” about staggeringly high valuations, rising geopolitical tensions and looming potential regulatory changes.
“Additionally, market volatility can be influenced by fluctuating energy prices and economic policy, which is still uncertain,” he adds. “Overall, the market has demonstrated great recovery and growth so far this year, but there are still many looming questions that have yet to show a clear direction toward an answer.”
6 Market Risk Factors for 2024
With the market poised to react to several catalysts, what are the biggest risks keeping investors up at night? These six issues certainly qualify:
— The employment picture.
— Inflation and consumer confidence.
— Geopolitical risks.
— Short-term market volatility.
— The Fed’s response.
— Investor jitters.
The Employment Picture
The stock market is always forward-looking, says Gianmaria Feleppa, market expert and CEO of Milan, Italy-based UCapital Fintech Group. “If it thinks the economy is moving in a bad direction, stocks will sell off,” he says.
That likely won’t happen if companies are hiring and the U.S. unemployment rate stabilizes between about 3.5% and 4%, as it has since late 2021. In June 2024, the unemployment rate ticked up to 4.1% but changed little from the previous month. The jobless rate was notably lower a year earlier, however, at 3.6%.
“Companies are producing and making profits, consumers are continuing to buy, people are going on vacations, things are pretty good,” Feleppa notes. “Jobs are important because stable employment means people have money to pay their bills and buy nonessential items, such as vacations, new cars and new clothes, which moves the economy.”
That makes underemployment a valid concern, Feleppa says. The unemployment rate has increased from its 50-year low last year, but it’s not enough to cause the Fed to cut interest rates. “It’s always an important issue since labor-market resilience drives consumer spending and underpins the economy,” he adds.
Inflation and Consumer Confidence
Consumer purchases are the largest contributor to U.S. economic growth, making up about 70% of gross domestic product, or GDP.
“This means the economy hinges on consumer confidence and sentiment,” Feleppa says. “The Conference Board’s most recent consumer confidence report came in with signs of stability, which is good. However, it’s slightly lower than May’s figures amid worries about the economic outlook.”
Still, consumers remain upbeat about the labor market and expect inflation to fall. Meanwhile, the report showed consumers feel a recession is less likely over the next 12 months, while “consumers’ assessment of their family’s financial situation, both currently and over the next six months, was less positive,” according to the Conference Board.
Pretty much every key economic indicator, including consumer confidence, is impacted by inflation.
“Inflation is important because it hurts consumers’ spending power,” Feleppa says. “Inflation has been sticky, but has come down dramatically since last year. And while it’s still above the Fed’s target, it’s a much better inflation rate than the rest of the world.”
However, there’s no guarantee that inflation will subside. The U.S. inflation rate bounced back up after November 2023 before settling at 3% in June 2024, as measured by the consumer price index.
“Persistent inflation can significantly slow down purchasing power and lead to higher interest rates, which ultimately dampens economic growth and reduces corporate profitability, something we have seen firsthand since 2021,” Scibilia says.
Geopolitical Risks
Along with stubbornly high inflation and rising consumer prices, dangerous geopolitics may be the biggest market breaker in the second half of 2024.
“The conflicts in Eastern Europe and the Middle East are pretty serious compared with recent history,” says David Russell, global head of market strategy at TradeStation in Chicago. “There’s no direct impact on stocks, but escalation could rattle nerves.”
Overshadowed by the Ukraine and Middle East conflicts, a potentially damaging geopolitical risk is the conflict between China and Taiwan. “There’s been some rumbling, but thankfully it’s not significant,” Russell notes.
Short-Term Market Volatility
Historically, the third quarter has been the worst-performing quarter for stocks, and the chance of a market slide this year is a topic of discussion.
“That’s especially the case with the uncertainty of the upcoming November elections,” says Rod Skyles, blogger and market analyst at The Unconventional Economist. “Still, there’s little doubt this historic market run has met its limit.”
Once the top-performing few stocks from the S&P 500, especially Nvidia Corp. (ticker: NVDA), are taken out of the equation, the U.S. stock market “has significantly underperformed” the index, and nearly 40% of the 500 stocks in the index are down year to date in 2024, Skyles says.
“For shorter-term investors, some profit-taking may be in order in this market, while longer-term investors should know it’s difficult to time the market, even as the market momentum is still upward,” Skyles adds. “That could change quickly, but unless one is risk-averse, having some patience to see how things play out might be the best current course for most investors.”
The Fed’s Response
Another big risk in the second half of 2024 is that market participants continue to underestimate the resolve of the Fed to tame inflation decisively.
“Investors underestimate the Fed’s resolve because they are too focused on the monthly inflation and labor numbers while ignoring the more important financial history guiding the Federal Reserve’s hand,” says Mark J. Higgins, senior vice president at Index Fund Advisors in Portland, Oregon. “One of the gravest errors in the Federal Reserve’s history was failing to maintain tight monetary policy and nip inflation in the bud in the late 1960s and 1970s.”
Each time the Fed loosened monetary policy too soon, it weakened its credibility and allowed increasingly high inflation expectations to become entrenched in the economy.
“This is why Paul Volcker was forced to raise the federal funds rate to more than 20% to end the Great Inflation from 1979 to 1981,” Higgins says. “In 2024, the Federal Reserve is unlikely to repeat this mistake if only because many FOMC members, including Chair Jerome Powell, remember the costly consequences.”
The stock market still miscalculates the Fed’s determination to maintain its hawkish position. “That creates conditions modestly more conducive to a financial panic,” Higgins adds. “Moreover, there is precedent from periods similar to the one we are in that suggest a soft landing is less likely than a hard one.”
Investor Jitters
If the economy starts to look shaky, investors may hurt their own cause by rushing to the exits. Then, when the storm has quickly passed, those same investors may try to get back into the market by any means necessary, and at any price.
That’s called trying to time the market, a strategy that usually makes things worse, portfolio-wise.
“Timing the market can be difficult, and the biggest mistake would be attempting to hit a high or low point in the market to sell or buy stocks,” Skyles says. “It’s okay to look for trends, but timing the market isn’t advisable unless you’re a market professional that buys and sells stocks daily.”
Other market experts advise spending more time in the market rather than trying to time it.
“Time in the market drives long-run returns versus timing the market,” says Steve Lowe, chief investment strategist at Minneapolis-based Thrivent. “Historically, missing just a handful of market days each year can significantly depress returns, such as being out of the market as stocks rally sharply and quickly from a market low point.”
One stock market barometer Lowe likes is company earnings.
“The strength of the U.S. stock market in this economic cycle has been driven predominantly by impressive earnings growth from a few mega-cap technology stocks. Should these stocks stumble, the market rally could falter,” he says. “A continued healthy market depends on a broadening of earnings growth into other sectors.”
What to Do if You Have Extra Money to Invest Right Now
If you have additional capital and are hesitant to put it to work in the stock market, investment gurus say that’s understandable, but it’s also a missed opportunity.
“You should always use academic investing principles and eliminate speculating and gambling,” says Mark Matson, founder of the investment advisory firm Matson Money and the author of the book “Experiencing the American Dream: How to Invest Your Time, Energy and Money to Create an Extraordinary Life.”
First, decide how much equity exposure you can handle and what your time horizon is, Matson says.
“Typically, the longer you have, the more aggressive you can be, then diversify as much as possible,” he says. “Look at structured investment funds, which can help investors capture dimensions of return they may not normally get in a typical index fund.”
Also, work with a trusted investment advisor before making any big decisions, he adds.
“Investors will always be tempted to sell when things look bleak and buy when the market is high. Fear often rules the day,” Matson says. “Fear of losing money and fear of missing out can be destructive.”
“We are living in an extraordinary time, and there is much chaos for investors to navigate,” he says. “The fear of war alone can destroy investors’ peace of mind, so a coach can help you stay disciplined when all else fails.”
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Update 07/17/24: This story was published at an earlier date and has been updated with new information.
