Update on the Markets:
| Index | 3rd Quarter 2024 | Full Year 2024 |
|---|---|---|
| S & P 500 (Large US Stocks) | 5.89% | 22.08% |
| Russell 2000 (Small US Stocks) | 9.27% | 11.17% |
| FTSE All-World ex-US (International Stocks) | 8.48% | 14.69% |
| Barclays US Aggregate (Bonds) | 5.20% | 4.45% |
October 2024
Key takeaways
► Another excellent quarter for stocks
► Small and international stocks shoot up
► Inflation moderating
► Rate cuts support risk assets
► The election looms
Strong Market
There were several rocky moments in the third quarter, including a drop of over 10% in August, but investors who stuck with their portfolios were greatly rewarded. The third quarter saw another strong performance by the S&P 500 index, up 5.28% in the third quarter and over 22.0% so far this year. Even more significant was the participation of small-cap and international stocks – long the market laggards – up 9.27% and 8.48% in the quarter, respectively. Though these stocks still lag the S & P year to date, they were the market darlings in the third quarter and should continue to do well as interest rates fall. The broadening of the market is a healthy sign that this rally is sustainable, and tech (primarily the so-called “Magnificent 7”) isn’t the only sector contributing to performance.
Inflation Cools
The Federal Reserve has two mandates: maximum employment and price stability. In the past two years, inflation has been accelerating, and the labor market has been so tight that the Fed has had to concentrate on cooling prices by increasing interest rates.
Between March 2022 and July 2023, the Federal Open Market Committee raised the federal funds target rate by 525 basis points (5.25%), making this tightening cycle, which now appears to be over, the fastest in four decades.
However, inflation appears to be moderating now, so the Federal Reserve can begin lowering rates to keep the job market healthy and the economy from falling into a recession – and to achieve a soft landing.
On September 18, the Fed surprised Wall Street with a half-point rate cut. Fed Chairman Powell noted that the upside risks to inflation have diminished while the downside risks to employment have increased. “We know it is time to recalibrate our policy,” he said, confirming that the balance of risks is “now even.”
Rate cuts are good for risk assets (usually)
Stocks and bonds rallied after the Fed cut rates by a half-point. Not only is a half-point move quite rare, but Fed Chairman Powell confirmed that he wants to “normalize” rates. Such a move is quite different from standard procedure. The Fed usually cuts rates after seeing signs of a weakening economy. This time is different because Powell is trying to prevent a recession, i.e., achieve a soft landing. In other words, the Fed is being proactive instead of reactive. Quite unusual.
Rate cuts are usually very supportive of risk assets, primarily stocks.
Historically, the S&P 500 has increased a year after cuts began, provided we don’t fall into a recession. Powell may yet achieve the allusive soft landing. Most economists don’t predict a recession in the next 12-18 months. GDP growth will be 2.3% in 2024 and 2% in 2025, according to the median estimates by 37 economists polled in the FT-Chicago Booth survey in September.
US Presidential Election
It is no surprise to anyone that the upcoming US presidential election will be very tight. Polls suggest that the race is a toss-up. Moreover, we may not know the winner of the White House on the morning of November 6 or even later. There will be no repeat of the “Bush-Gore Hanging Chad” fiasco of 2000, but other snafus may occur. Several states are counting ballots by hand, significantly slowing the tabulation of votes. Mailed ballots could take longer to process. Expect delays and lawsuits. All of this will not be good for the markets. Moreover, historically, election years bring about volatility as investors react to potential changes in fiscal and economic policies. One crucial issue: The Trump-era tax cuts will expire in 2025 if Congress does nothing.
What to do?
Hold tight! Our portfolios already have an appropriate amount in small-cap and international stocks, nicely participating in the recent rally. Rising oil prices due to intensifying Mideast tensions, China’s stimulus, and a healthy labor market make me wonder if inflation has been beaten. So, I don’t want to add to long-term bonds. And yields on money market funds and short bonds will continue to fall. Until we pass the election, I will add investment-grade floating-rate ultra-short bonds – a win-win. These bonds will protect capital if interest rates rise and allow for participation in tighter corporate bond spreads if the economy stays healthy. They will increase if interest rates fall.
Thank you for your trust and confidence. Please let me know if you have any questions or comments.
Sincerely,
Henry
Henry Gorecki, CFP®
HG Wealth Management LLC
401 N Michigan Ave, Suite 1200
Chicago, IL 60611
312-723-5116
