Mid-year Outlook
With second quarter GDP exhibiting a growth rate of 3% the resilience demonstrated by the United States economy was truly impressive. This followed a modest growth rate of 1.6% for the first quarter and was parallel to the 2.9% rate realized for all of 2023. The growth in the second quarter was led by consumer spending, increased inventory investment and business
investment.
We have posited for quite some time that the United States economy was not likely to fall into recession in the near-term and given the second quarter’s GDP reading it was not in imminent danger of seeing its growth rate fall into negative territory.
Expectations for third quarter GDP growth are currently around 2.5%. The Federal Reserve Bank of Atlanta’s GDPNow reading for the third quarter concurs with this estimate given its current reading which is also at 2.5%.
While we did see some moderation in various data points during the quarter, none of them weakened sufficiently to alter our assessment of recession probability. For example, the unemployment rate increased to 4.3% in July but then declined in the following two months. Another employment indicator, initial claims for unemployment, also spiked upward to a level of 250,000 on July 26 only to recede back to 225,000 on September 27.
Despite the fact that economic indicators did not point to imminent recession, there was sufficient concern regarding a potential weakening, combined with ongoing moderation in the rate of inflation to propel the Federal Open Market Committee (FOMC) to make an initial cut to the Fed Funds rate at their September meeting.
Fourth Quarter Outlook
We anticipate that growth will moderate in the fourth quarter but remain positive with an increase of 1.5 – 2%. While this rate of growth represents a slowing from the prior two quarters, it is definitely not recessionary. Contributing to the confidence of this outlook is the ongoing strength of consumer spending. As is commonly reported, the United States consumer accounts for approximately two-thirds of economic activity. With wages continuing to grow at a pace higher than the inflation rate, consumers particularly at the higher end of the income spectrum will have the capacity to spend.
This deceleration in growth, combined with stable readings on the inflation front, is anticipated to translate into additional rate cuts from the Fed.
Risks to this outlook include the heightened tensions throughout
multiple regions around the globe and the prospect of significant policy changes that might occur following November’s election. Additionally, smaller but notable risks could arise from the impact of Hurricane Helene and ongoing labor strife across numerous industries.
Asset Allocation Overview
Financial assets produced strong returns across the board in the third quarter with bonds, domestic equities and foreign equites all generating solidly positive returns. Most notable were the results generated by fixed income and foreign equities as both recorded much stronger results than those produced in the second quarter. Fixed income was particularly impressive with its third quarter return of 5.2% which followed negative and flat results in the first and second quarters, respectively. As has already been well documented, a key driver for bonds was the anticipation of an initial reduction in the Fed Funds rate along with the expectation for additional cuts over the remainder of the year.
Strength in foreign equites was broad with both developed and emerging market indices outperforming United States equities. For emerging markets, a soaring performance from Chinese equities was a key driver. In the third quarter the MSCI China Index advanced 23.5%. For just the month of September the return was an astounding 23.9%. This performance was driven by the massive economic stimulus being injected into China’s economy. We will be monitoring these developments to assess the sustainability and impact of such an outsized move. Even with the powerful performance of international equities in the third quarter on a year-to-date basis, the United States is still on top relative to its foreign counterparts. As a result of the strong returns generated across the financial asset spectrum in the third quarter, the results for all seven of our strategic asset allocation benchmarks were solidly positive.
The neutral positioning we have maintained for some time across our seven investment objectives continued throughout the third quarter. As we have discussed in prior issues of this publication, our Asset Allocation Committee regularly evaluates prospective changes to our allocations, as well as the potential for the incorporation of additional asset classes within our allocations. While we continue to see brief periods of leadership changes across and within asset classes and forecasted expectations of their continuation thus far these have proven to be short-lived. One of the four tenets of our investment philosophy is to focus on a longer-term perspective. And if we reach a point where we feel any adjustments to our allocations are warranted based on our assessment of markets given that longer-term perspective, we will not hesitate to implement those adjustments.
In closing, we reiterate the message typically delivered at this juncture of our publication. We recommend investors periodically review their investment objectives to ensure they reflect their goals, their risk tolerance and time horizon.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.