With the S&P 500 posting a solid return in the first half of 2024, the natural question arises: does this opening strength have historical relevance for the second half of the year? The simple answer is yes; there is a positive correlation between the first and second halves of the year when the first half is strong. However, the presidential election cycle complicates the question somewhat.

Beyond persistent market strength and election uncertainties lies the question of the timing of Fed rate cuts. Recent progress on inflation and a nascent softening in some economic data suggest that a move at the September Fed meeting is plausible, if not yet probable. While broad economic trends remain positive, weaknesses in housing, depressed manufacturing sentiment, and a minor but notable uptick in the unemployment rate indicate that subtle cracks may be forming.

As we enter the second half of the year, our outlook is marginally more cautious than it was in the first half. Market conditions remain generally favorable for equities, but the prospect of volatility in the second half of 2024 has increased; we see early-stage signs of slowing in the economy (still reversible), and there is considerable potential for the Fed to misstep.

Spreads for high-yield and investment-grade corporates remain far below long-term averages and medians and are in the bottom quintile (rich) or lower of historical performance.

Credit spreads are likely to remain range-bound with income from coupon payments driving returns outside of interest rate moves. Ongoing strong demand, solid economic growth and generally sound fundamentals should support spreads at relatively rich levels.

We expect defaults to move higher in lower-quality high yield and leveraged loans but remain below past recessionary peaks.