Stocks, inflation and other economic themes to watch in second half of 2024

The economy has performed well enough over the first half of 2024, with inflationary increases moderating, jobs still plentiful and no serious recession risks on the horizon. The financial markets have fared even better, with stocks up a solid 15% over the first six months.

All of that doesn't mean Americans are happy on balance, especially over high price levels, but the economic and financial backdrop has been steady. Here are some questions that might shape the second half of the year.

Will inflation progress be enough?

Inflation has been coming down, but not quite to the 2% level that the Federal Reserve wants to see before it starts cutting interest rates. Economists at Northern Trust liken this to the “last mile problem,” the challenge of getting parcels and other deliveries to their final destinations. “After moving smoothly downward during the latter half of last year, inflation has encountered resistance as it nears the desired destination," they wrote in a midyear report.

The Fed has held off on its easing strategy. That might finally end in September, when various observers including Northern Trust expect a cut in rates, assuming the inflation data stay "well-behaved between now and then.”

The flip side to further inflation progress, and a return to lower interest rates, is that it might require weaker economic growth to get there. "But the risk of recession seems very low,” according to Northern Trust.

Can the Magnificent 7 keep it up?

The stock market has been hot lately, but the momentum hasn't been spread evenly. Large growth stocks, headed by the "Magnificent 7" group of tech giants, were up about 38% on average over the 12 months through June 30, compared to around 15% for small companies, 6% for micro-caps and 12% for international stocks. Much of the hoopla for tech reflects excitement over artificial intelligence, with its productivity-increasing potential.

AI giant Nvidia, one of those stocks, by itself accounted for slightly more than half of the S&P 500’s total gain in the second quarter, observed Nicholas Colas, co-founder of Data Trek Research. Along with Nvidia, the other Magnificent 7 stocks are Alphabet, Amazon, Apple, Meta, Microsoft and Tesla.

But hot stocks rarely can keep the pace indefinitely, which is why investors might consider a mid-year rebalancing if they're heavy into the tech giants. Rebalancing involves selling off some high-flying assets and investing the proceeds in laggards, to maintain your original targeted portfolio mix.

If you aim for 60% stocks and 40% bonds, for example, you might want to do some tweaking if you’re now at 70%-30%. You don’t want to rebalance too often, especially if you might incur transaction costs or realize taxable gains. But it can be a good way to stay on course, especially with the historically weaker months of September and October coming into view.

The biggest 100 stocks in the S&P 500 now account for 70% of the value of the index, meaning the other 400 weigh in at around 30%, said Jack Ablin of Cresset Asset Management. Two decades ago, the top 100 accounted for a more-normal 55%.

The Magnificent 7 stocks collectively are now worth more than those of every other stock exchange except for the U.S., according to Comerica Wealth Management. If that doesn't give you reason to be cautious, it should.

Will the election prove unsettling?

This presidential election already has provoked plenty of anxiety, with a lot of Americans not enthusiastic about either Donald Trump or Joe Biden. But does that mean the election will trigger a stock-market selloff? Probably not.

Presidential elections typically are benign for stocks, and this year has been exceptionally strong.

"History suggests that fast-opening halves of the year generally maintain their momentum through the second half," said Comerica in its analysis. Since 1990, the S&P 500 had risen at least 10% by midyear on 10 prior occasions. "In each instance, the index produced a positive return the second half of the year," Comerica added, with those second-half advances averaging 10.8%.

According to an analysis by U.S. Bank, presidential elections usually don't exert much medium- or long-term impact on the stock market. However, a few election scenarios could be significant.

One positive for stocks would be a Democrat victory for the White House, coupled with Republicans gaining or keeping control of both the House and Senate. Another favorable scenario would be a Democratic presidential victory and split party control of Congress. In most other scenarios, U.S. Bank spotted no clear trends for investors.

While a Biden victory in November doesn't appear especially likely at this moment, presidential re-election years tend to be favorable for stocks, with the S&P 500 rising in every such instance since 1944, Comerica said.

Reach the writer at russ.wiles@arizonarepublic.com.