This is a brief overview of Cumberland Advisors’ thoughts on financial markets as we head into the second half of 2024. We know that there could be some volatility in markets based on this anything-but-normal presidential election year; however, in the end we believe economics will continue to drive markets, and that is reflected in our outlook here as well. We are publishing this the day after President Biden has dropped out of the nomination. We believe that going from here into the Fall there is probably a better chance of election polls narrowing than there was a week ago.
CIO Thoughts – David Kotok, Co-Founder and Chief Investment Officer
In the January 2024 semi-annual Cumberland outlook, I opened my section with this statement:
In my opinion, the border and the US labor force are paramount political issues in 2024. The Biden administration has been viewed by many as weak and indecisive, and recurring border failures appear visually on the nightly news without respite. That is one side of the border issues divide. On the other side we witness the Trump harangues against asylum seekers and immigrants with intensely negative rhetoric. Trump has invoked the historical “blood libel” images used in pre-WW2 rhetoric. It is fueled by Trump’s self-appointed acolyte, Stephen Miller, on the other side. This debate flows to the labor markets.
That assessment is certainly out of date now, even though the labor-market impacts are still there. The paramount need for immigrants is still there. There are still more job openings than there are job seekers. Please don’t misunderstand me. It is the public discourse, the media narrative, the political divide that has changed. The subject of the border, immigration policy, the federal failures under both the Trump Administration and then under the Biden Administration are a fair list of serious issues. But the media personalities have dropped them in perceived importance. Financial markets are becoming focused on politics and specifically on the outcome of the contest between the remaining “old man” and the outcome of decisions by the Democrats about Harris as a replacement for Biden. Note that Trump is now the oldest candidate ever to be nominated for the presidency since Biden dropped out before his actual nomination.
We’re seeing a different dynamic in the coming few months leading to the election. I will be blunt.
For months, we have watched the two aging and sometimes stumbling candidates in what has been for me a depressing show of political ineptitude by both of our major political parties. Neither Biden nor Trump inspired a unifying national confidence, IMO. The media, and hence the public debate, was focused on Biden’s cognition or Trump’s felony convictions or Biden’s gait or Trump’s obesity or Biden’s stuttering or Trumps speech slurs or Biden’s forgetfulness or Trump’s forgetfulness. Polling shows that the majority of the country said that they didn’t want either one of them. That entire dynamic has changed. Biden is out. Harris is probably in. The Trump campaign has to write off many $100s of millions in sunk costs spent in attacking and bashing Biden.
The debate fiasco, and its aftermath, is now old news. We have 100 days or so of an entirely new political contest.
Until the debate fiasco, financial markets ignored most of the politics. The S&P 500 set a new all-time high, while the Treasury and the Muni markets have seemed to stay within their trading ranges, if I use the broad definition of trading range. Let’s call the trading range a 50-basis-point band at the intermediate-maturity (10-year) tenor.
When Trump’s polling numbers improved after Biden’s disastrous debate performance, there were some noticeable shifts. They may have reflected portfolio adjustments by some market agents who wanted to adjust portfolios in anticipation of a Trump victory. Inflation-oriented positions found support. The outlook for federal deficits grew, as Trump is perceived to be uninterested in any fiscal discipline. That has been his history. For securities that may be impacted by higher tariffs, there was a reaction in the post-debate environment.
As this is written, there is no forecast path for political outcomes that has high confidence. We will start to see new polling data shortly and we will watch the betting markets, but the situation is now so fluid that any forecast is made with low confidence. This election-year cycle hasn’t peaked yet. Stay tuned.
Economic Outlook – David Berson, Ph.D., Chief US Economist
The key points you should know:
1. The economy is cooling and should grow at a slow, but positive, pace over the remainder of the year.
2. Slower job gains and a modest rise in the unemployment rate are likely.
3. Inflation should cool a bit further over the course of the year, although it will probably remain a bit above the Fed’s 2.0 percent goal.
4. We expect the Federal Reserve to ease monetary policy over the second half of the year, perhaps as soon as the September FOMC meeting.
5. The soft landing appears to be here – but for how long?
A soft landing for this year looks increasingly likely. But what about 2025?
The Treasury yield curve remains inverted, although less so, and the Conference Board’s Index of Leading Economic Indicators continues to decline. Historically, these two have been excellent predictors of economic decline – but so far, a downturn remains on the distant horizon. Recession odds for 2024 have fallen sharply as we get to mid-year (with only 6 months remaining in the year, after all) and as underlying economic growth slows but is not close to going negative. The good news is that slower growth is helping to bring inflation down (tighter Fed policy does work), and that should allow the Fed to start easing policy this year (with more easing probable for next year). That will be positive for growth in 2025 and beyond.
Using the most recent Atlanta Fed GDPNow estimate for second-quarter real GDP, growth in the first half of this year should slow to 2.1 percent – compared with 3.1 percent for all of 2023). But even with the economy slowing, nonfarm payroll growth remains solid (although job growth is also cooling). While the unemployment rate has increased to 4.1 percent, it remains historically low. Moreover, weekly unemployment claims, while trending upward, are still quite low, with the 4-week average at nearly 235,000 – well below the approximately 300,000 level that would raise significant concerns about the continuation of the expansion.
As the odds of a 2024 recession have declined, the chances that growth will remain too strong with inflation reaccelerating or at least remaining well above the Fed’s goal have also dropped. US economic activity has slowed, and it’s not clear what would cause it to reaccelerate. Even if the Fed begins to ease in September, the impact on the economy of such a move would be at least half a year in the future, given the normal lags of monetary policy. And expansionary fiscal policy (probably the key reason why tighter monetary policy hasn’t slowed the economy more significantly) is finally starting to lose its ability to boost the economy. Moreover, there are signs that inflation figures were “inflated” early in the year with residual seasonality not accounted for. This implies that the inflation figures will be a bit lower over the remainder of the year to make up for the higher figures earlier. With inflation moving lower, the real federal funds rate would increase if the Fed left policy unchanged – increasing the probability that the Fed will ease at least some this year. But the Fed is likely to be very cautious in easing so as not to repeat the policy errors of the late 1960s to late 1970s. At this point, our view is that the Fed will ease twice this year – but whether the first move will be at the September or the November FOMC meeting is still not clear.
Longer-term interest rates should slip in response to growing expectations of Fed easing (and then to actual easing). Typically, long-term interest rates decline by less than short-term rates at the start of easing cycles, and we expect that to occur this time, as well – leading to a less-inverted yield curve as 2024 progresses and eventually a positively shaped yield curve again (probably next year).
Continued, if slower, economic growth coupled with easier credit conditions as the Fed eases monetary policy and lower inflation should be supportive for equity markets. Note, however, that we do not have an explicit forecast for equity markets other than to say that those markets will trend higher over time (interrupted by occasional declines, which tend to be bigger when associated with recessions).
This view looks very much like what analysts have been calling a “soft landing” – and that is indeed what we expect for the remainder of this year. And as long as inflation continues to drop to (or close to) the Fed’s longer-term 2.0 percent goal (using the Fed’s preferred PCE price index measure, rather than the narrower CPI), allowing the Fed to ease some this year and a lot next year, that soft-landing scenario should continue into 2025.
Shocks, economic and geopolitical, could disrupt this very positive outlook. By their nature, shocks are low-probability events (that in hindsight perhaps should have been viewed as having a higher probability) that are not easily forecastable. Among potential shocks could be the results of the US elections in November, changed economic policies that are clearly detrimental to the economy or inflation, expansion of the conflicts in Ukraine and/or the Middle East – and perhaps new conflicts in Southeast Asia. There are certainly many more. While conditions are positive today, leading to our soft-landing outlook, negative shocks are more likely the farther out you look. And we haven’t even mentioned longer-term problems such as high and rising budget deficits in the US, which may have significant negative impacts eventually, but apparently not today.
The Fed – Bob Eisenbeis, Vice Chairman & Chief Monetary Economist
After suggesting in both the December 2023 and March 2024 Summary of Economic Projections (SEPs) that it contemplated three rate cuts in 2024, the FOMC scaled back its expected rate cuts to only one in 2024. Moreover, during the June post-meeting press conference, Chairman Powell would not offer an opinion on when that cut might come, if it did, and argued that timing would depend upon incoming data. Clearly, the economic situation has changed to cause the FOMC to revise its projected rate cuts.
The economy clearly slowed in the first half of 2024. However, that slowing was not significantly evident in job creation at the national level. The economy created an average of 267,000 jobs in Q1 of 2024, compared to an average of 212,000 in Q4 2023 when the economy was growing much faster. Moreover, new claims for unemployment insurance were about the same as they were in Q4 2023. Wage compensation as measured by the Employment Cost Index slowed slightly in 2024 but still increased 4.2% year-over-year (not seasonally adjusted), indicating continued strength in the job market.
The real reason for the change in the FOMC’s projections lies with the inflation story. PCE inflation turned mixed in 2024, moving in the wrong direction in March and April, and now is at 2.7%. CPI inflation is even higher than PCE and has been much more volatile, bouncing from 3.1% in January to 3.5% in March and declining to 3.3% in May and to 3% in June. The sharp increase in new claims for unemployment claims signals further slowing and could push the FOMC to change its timeline.
The Committee had been clear, prior to its early June meeting, that its three projected rate cuts for 2024 assumed that inflation would continue on the downward path it had followed in 2023. But the reversal of PCE inflation’s path in 2024 caused the Committee, as was clear in the minutes of the meeting, to question whether it should continue its current policy of no rate changes. Chairman Powell was very clear that policy for the remainder of 2024 would depend upon both incoming data and critically upon the Committee’s gaining confidence that PCE inflation was on the desired path to 2%. He declined to speculate either on how many months of declining inflation would be needed to create that confidence or on when that might be expected to happen. However, given the pattern of inflation we have had so far, it seems that there is little chance for a rate move at the FOMC’s next meeting at the end of July, and we won’t get a new set of SEPs until September. It would probably take three months of declining PCE inflation before a rate cut would be on the table, which pushes the first possible cut until November at the earliest, unless the economy slows threatening a recession or we get surprising declines in PCE inflation.
Added to these factors are the prospects for increased uncertainty on both the political situation domestically and the geopolitical front. As the US election progresses, it will be more and more difficult for the FOMC to make a rate change without raising questions about whether the cut was made to support a presidential candidate. Then we have the problems in Ukraine, Gaza, and the rest of the Middle East.
Equity Markets – Matt McAleer, President & Director of Private Wealth
The encouraging inflation news coupled with growing earnings estimates should provide a stable environment for equities throughout the back half of 2024. After reaching extreme performance dispersion between cap-sizes during Q2, the reversion to the mean trade has been powerful in July. We are currently in a blend of growth and value ETFs along with individual equities and are comfortable with that allocation. While diversification has been a drag on YTD performance, cycles ebb and flow and markets tend to reward strategies that remain flexible over longer time horizons.
Currently, we are interested in adding to our growth sleeve as the recent mild pullback may create opportunity as extremes get resolved. We can accomplish this goal through all cap sizes as large cap may find it difficult to dominate relative performance after touching recent extremes. One idea that our investment committee agrees on is the probability that after an extended mild stretch, volatility could be ready to rev up. By embracing increased volatility, we are confident that reasonable allocation adjustments can be made at attractive price levels.
Taxable Fixed Income – Dan Himelberger, Portfolio Manager & Fixed Income Analyst
Treasury Movements
During the first half of 2024, the Treasury market experienced heightened volatility as market participants tried to predict when the Federal Reserve would start cutting interest rates. The 10-year Treasury yield reached a low of 3.881% and a high of 4.705% before closing the first half of the year at 4.397%. The net result of this volatility was higher yields across the curve. The 10-year and 30-year Treasuries closed the first half of 2024 up 51.7 basis points and 53.0 basis points respectively. The complete Treasury yield curve movement for the first half of 2024 is detailed below.

Spread Movements
Investment-grade corporate and taxable muni spreads continued to tighten for much of the first half of the year, resulting in multiyear lows in both products. The spread on the Bloomberg US Corporate Bond Index reached a low of +85 before closing the first half of the year down 5 basis points at +94. While the spread on the Bloomberg Taxable Muni US AGG Index reached a low of +72 before closing the first half of the year down 9 basis points at +83. As noted in our previous reports, we believe the potential upside in these spread products has been largely realized. As a result, we have begun reducing our overweight position in these securities and increasing our allocation to Treasuries. We expect these spreads to eventually widen from these low levels, which would present an opportunity to reinvest in these spread securities later in the year.
Outlook
As we move into the second half of 2024, we will closely monitor economic data, with a particular focus on inflation. Our long-term outlook anticipates lower interest rates, as we expect the Federal Reserve to begin cutting rates later in the year. Accordingly, we plan to gradually increase our Treasury exposure over time, as long as spreads remain low. This will maintain a higher level of liquidity, providing more flexibility for strategic duration adjustments going forward. While taking a conservative approach to credit, we will also seek to capitalize on attractive investment opportunities as they become available.
Tax-Free Municipal Bonds – John Mousseau, Chief Executive Officer & Director of Fixed Income
The tax-free bond market saw a marked increase in supply during the first half of 2024. New-issue supply was up about 40% over the first half of 2023. This was during an overall bond market that experienced volatility in the first half of this year. The ten-year Treasury began the year at 3.88% after the vigorous year-end rally of 2023. Stronger than expected job numbers, continued low jobless claims, and some disappointing inflation numbers moved the ten-year bond yield up to 4.70% by mid-April. Then some better CPI numbers, some softer job numbers, and a backdrop of lower economic activity brought the ten-year bond yield to 4.47% by the end of the quarter. Amidst this backdrop, Muni bond yields hung in there during the first half.
As you can see from the chart below, the tax-free Muni market had a particularly good relative performance in the first quarter and gave some of it back in the second quarter.

Our thoughts on the good relative performance through the first four months of the year are that it was largely due to the extraordinarily strong demand for deals from investors (smelling a change in tax policy coming this fall after the election). But at the same time, we think the demand for Treasuries waned versus other taxable instruments such as corporates and taxable Munis because of the ballooning US deficits, the credit downgrade of the US government last year by Fitch, and the dysfunctional qualities of the US Senate and House of Representatives.
As we investigate the second half of 2024, we are constructive on tax-free Munis for a number of reasons.
Recent inflation announcements have been more benign, and the market is now pricing in one to three rate hikes before year end. This is fewer than at the beginning of the year but more than were forecast in April. Federal Reserve Chair Jay Powell has talked about needing to see progress on inflation before lowering short-term rates. We are now getting it.
The coupon level of tax-free portfolios is now much higher than it was at the end of 2021, for total-return portfolios.
Another factor to consider is that the Trump-era tax cuts go away at the end of 2025 unless Congress acts to restore them. Given that the current deficit is now 1.3trn vs 665bln at the end of 2017, there is a case to be made that Congress may attack these deficits by letting the tax cuts expire. This should raise the value of Munis, as the taxable equivalent yields will be boosted. There is a greater possibility now of an election outcome that will leave us with a divided government (i.e. the House of Reps, Senate, and White House not all held by the same party.)
We are carefully monitoring credit because we believe that as the economy slows, state and local government balance sheets will be more challenged, especially as the stimulative effects of Covid begin to wane. But overall, municipal credit quality is still very high.
The combination of slowing inflation, an economy cooling at the margin, and the probability of higher taxes rather than lower should all contribute to Muni performance over the balance of the year.
Municipal Credit Outlook – Patricia Healy, Senior Vice President of Research
We expect the credit quality of municipal bonds to be stable as we head into the second half. The economy continues to perform well and, for now, a soft landing is expected. The economy has not slowed as much as anticipated at the beginning of the year and inflation is decelerating with some Fed governors indicating an interest rate cut in September. To some extent people, businesses and municipalities are becoming accustomed to higher rates. There are some stresses too, such as higher wages and costs, difficulty hiring, budgeting without pandemic aid and in some cases adjusting to previously enacted reductions in tax rates and fees.
A less robust economy, a recession or an event could lead to revenue and tax under collections at municipalities. In most cases these under collections will be met with cuts in spending or increases in taxes and fees so that reserve levels remain strong. We may also see some drawdown in reserves to manage revenue and expenditure changes. A drawdown in reserves or rainy-day funds is not by itself a negative, reserves are there to cushion operations and for unexpected items. The problem arises when reserves are used for recurring expenditures and no plan is put in place to adjust the budget to a new higher expense level or cut expenses. This year’s hurricane season could provide a number of unexpected expense items.
Sector outlooks: Utilities for both power and water/sewer have slightly negative outlooks. In addition to having higher costs for supplies, wages and financing, utilities both electric and water and sewer also face increased regulation and increased construction costs to comply with regulation and for resiliency and asset maintenance. Rate increases are likely and although rate making is autonomous for many utilities affordability is a consideration that could limit rates and reduce debt coverage.
Sectors that remain under pressure or have negative outlooks are healthcare and transit while higher education is mixed as reputational schools with large endowments are stabilizing while smaller less established schools are struggling and even closing or being acquired. Wage increases have abated as more folks have entered the workforce, taking some of the pressure off, especially in healthcare. Transit systems are still seeing below pre-pandemic ridership levels and depend heavily on federal and state funding. These three sectors also were very dependent on pandemic aid, and future budgeting may be challenging.
Municipalities are well positioned to address potential recession or event challenges. Elements of resiliency include healthy accumulated reserves, good budgeting and fiscal management, established rainy day funds, improved pension management, good revenue growth, improved property tax bases, and increased sales tax revenue.
We thank all readers for their interest. Please remember to visit our website www.cumber.com to find information about Cumberland Advisors, the investment strategies we offer our clients and partner firms, and other relevant information.
John R. Mousseau, CFA
Chief Executive Officer & Director of Fixed Income
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