Market Commentary – October 2024
As we enter the final quarter of 2024, the U.S. economy remains on solid footing, continuing to defy many investors’ expectations from earlier this year. Rather than sinking into recession, the economy has grown at a steady—albeit slower—pace, inflation has moderated, and the Federal Reserve has transitioned to a monetary easing cycle. This has boosted both stock and bond markets, with the S&P 500 and Dow Jones Industrial Average reaching new all-time highs. While risks remain, particularly around geopolitical tensions and upcoming elections, the key takeaway for investors is to remain focused on long-term strategies rather than short-term noise.
Economic Resilience and Market Strength
The U.S. economy has shown remarkable resilience throughout 2024. GDP growth, while slower than the post-pandemic surge, continues to exceed expectations, rising by 3% last quarter. Consumer spending has remained robust, supported by rising real disposable income, which increased from 1% to 2.4%. The personal savings rate has also been revised upward from 3.3% to 5.5%, offering households additional financial stability. Meanwhile, the labor market remains strong, with the unemployment rate at 4.2%. Although this is slightly higher than earlier in the year, it remains low by historical standards. The higher unemployment rate is attributable to an increase in labor force participation, driven in part by immigration. Importantly, we have not experienced large layoffs that coincide with recessions.
Corporate profit margins have reached record levels, with the S&P 500 posting pre-tax profit margins of 13%, a sign of increasing productivity and efficiency. At the same time, consumer spending has continued, fueled by steady wage growth and resilient economic fundamentals. These trends, combined with a more accommodative Federal Reserve, have propelled the market to new highs.
Despite investor concerns that markets might be “due for a pullback,” history suggests that market indices often hit multiple new highs during bull markets. These highs are typically a result of sustained earnings growth, economic expansion, and improving sentiment rather than indicators of imminent corrections. While pullbacks are inevitable at some point, they are notoriously difficult to predict. For long-term investors, staying the course has historically been the best strategy.
Fed Policy and Inflation Control
Inflation, one of the most significant economic challenges over the past two years, is finally nearing the Federal Reserve’s target of 2%. The Fed’s preferred inflation measure, the PCE price index, showed an increase of just 2.2% year-over-year, underscoring the Fed’s success in bringing inflation under control. This has set the stage for a shift in monetary policy, with the Fed making its first 50 basis point rate cut in September. More cuts are expected in the coming months as the Fed attempts to orchestrate a “soft landing” for the economy. Lower rates benefit the broader economy by reducing borrowing costs for businesses and consumers, supporting corporate investment and expansion.
This easing cycle is reminiscent of the mid-1990s when the Fed raised rates aggressively before reversing course and cutting rates once inflation fears subsided. The result then was a period of prolonged economic expansion and a strong bull market, which some believed could be mirrored in today’s environment. However, the Fed’s current challenge is to balance lowering rates without reigniting inflation or causing an overheated stock market.
As always, predicting the exact path of the Fed’s actions or their impact on the market is challenging. However, the easing of financial conditions could continue to support corporate earnings, which remain a key driver of stock prices.
Political Landscape and Its Market Impact
The upcoming U.S. presidential election is undoubtedly a source of concern for many investors. According to Pew Research Center polling, eight out of ten voters rank the economy as a top factor in their voting decisions. However, while elections are significant for policy and regulation, history shows that the market tends to perform well regardless of which political party holds office. Market fundamentals—such as corporate earnings, valuations, and economic cycles—have far more impact on long-term returns than political outcomes.
We’ve always encouraged clients not to “vote with their portfolios”. That advice remains as relevant now as ever. While policy shifts can affect taxes, trade, and regulation, these changes tend to occur gradually, and their impacts are often overestimated. The market has a long history of growth through different political administrations, and trying to time investments based on election outcomes typically proves futile.
Historically, election years have been strong for the stock market, and 2024 is no exception. Investors should maintain their focus on long-term goals rather than getting caught up in political speculation.
Geopolitical Tensions and Market Volatility
Geopolitical risks have increased in recent months, with tensions in the Middle East rising, particularly between Israel and Hezbollah. While such events can have significant real-world consequences, their direct impact on the U.S. stock market is often limited and short-lived. The ongoing conflict between Russia and Ukraine has also contributed to global instability, but despite these concerns, the stock market has remained resilient, experiencing only two 5% or greater pullbacks so far this year. The historical average is three per year.
One area to monitor is oil prices, which have edged higher in response to the Middle East tensions. However, the increase has been modest compared to past crises, largely due to the U.S. becoming the world’s largest producer of oil and gas. This energy independence has helped shield the U.S. economy from global supply disruptions.
For investors, geopolitical risks are always present, but history shows that staying invested through such periods tends to be more profitable than reacting to headlines. Markets have continued to follow broader trends, driven by corporate earnings and economic fundamentals rather than short-term geopolitical events.
The Broadening Market and AI’s Cooling Phase
A major theme this year has been the broadening of market participation. Earlier in 2024, much of the market’s gains were concentrated in a few large tech names, particularly those tied to Artificial Intelligence (AI). However, in recent months, the market has broadened significantly, with sectors beyond tech contributing to overall performance. In fact, the equal-weighted S&P 500 and the Small Cap 600 have quietly outperformed the traditional S&P 500 since mid-July, as large-cap technology stocks have taken a breather.
Source: Kwanti; YTD period is 1/1/24 to 9/30/24; Q3-2024 period is 7/1/24 to 9/30/24.
AI stocks, which dominated the headlines earlier this year, have cooled off after a period of rapid gains. While the initial excitement has subsided, the long-term potential of AI remains intact. Productivity gains from AI adoption are expected to continue, driving corporate profit margins and supporting broader economic growth. As with any transformative technology, there will be phases of hype and consolidation, but the underlying fundamentals point to long-term growth opportunities.
Fixed Income and the Shifting Bond Market
The bond market has also undergone significant changes in 2024, with the Fed’s rate cuts leading to lower yields across maturities. This has resulted in a normalization of the yield curve, where shorter-term bonds yield less than longer-term bonds. Bond prices move inversely to interest rates, so as rates fall, the value of already-issued bonds increases. This reversal from the bear market in bonds experienced in 2022 has provided relief to fixed-income investors, who now enjoy higher yields and the potential for price appreciation.
Conclusion: Stay the Course
As we head into the final months of 2024, the market is positioned at a crossroads, with the Fed cutting rates, an election on the horizon, and geopolitical uncertainties lingering. However, the underlying fundamentals of the economy—strong corporate profits, rising productivity, and stable consumer spending—remain robust. The improving fixed-income landscape could continue to bolster economic growth, ultimately feeding back into stronger corporate earnings and stock market performance. On balance, we see more tailwinds than headwinds. Since the beginning of 2022, economists have disagreed over whether the U.S economy will have a “hard landing” or a “soft landing”. It now looks as if we are headed toward a “no landing” whereby the economy continues to grow.
Investors should remember that volatility is an inherent part of the market. While there will undoubtedly be fluctuations in the coming months, history shows that those who maintain a well-diversified portfolio and focus on long-term goals are more likely to succeed. The key to navigating these challenges is to stay disciplined, avoid reacting to short-term events, and remain focused on your financial plan.
As always, thank you for your trust and partnership.
Chris Proctor, CIMA®
Chief Investment Officer
