Quarter 4 - 2024 Market Update

By: Eric and Jenny Hilliard

We want to start by expressing our sorrow for the destruction caused by Hurricanes Helene and Milton. Jenny’s hometown and Raymond James’ headquarters of St. Petersburg, Florida and our beloved mountains of North Carolina both experienced significant destruction and devastation. We have personal connections to both places and know people and businesses who have lost all their belongings. We have contributed both as a business and personally towards the many efforts to support those affected. We donated monetarily to support both areas and donated supplies and clothes to help those in small rural mountain towns impacted. We will continue to pray for and support all the people in these areas.

As expected, the fourth quarter of 2024 began with many reasons for the market to shudder; a port strike by the Longshoreman’s Association that fortunately only lasted a few days with a tentative agreement reached, increased tensions in the middle east and a too-close-to-call election only a month away. Incredibly, thus far markets have largely shrugged all this off.

Key Topics:

Third quarter market performance recap.
What a rate-cutting cycle means for investors.
The Fed has engineered a soft-landing for the economy…so far.
The flipped script may continue.
Why Investors should avoid responding emotionally to elections.

Third quarter market performance recap

As we expressed in the Quarter Three Market Update we anticipated increased market volatility during the quarter. Volatility did increase moderately. Still, as you can see below, all indices generated positive returns. Outperformance by the Russell 2000, representing smaller companies and the S&P 500 equal-weight index which represents the 500 companies in the index being weighted equally indicated a broadening out of investment interest. In addition to increased Investment into mid-sized and smaller companies previously lagging sectors, like retail and real estate also benefitted. The prospects of lower rates were likely a significant supporting factor enabling this change.

Here are returns of various indices as of September 30^th:

What a rate-cutting cycle means for investors

As we expected, the end of summer did see the sun set on the federal funds rates hiking cycle with peak rates of 5.25%-5.50%. The Federal Reserve (aka The Fed) cut rates September 18^th, surprising some with a larger 50 basis-point cut rather than a 25 basis-point one. They cited softening employment numbers with a resilient economy as reasons why they believed it was time to begin lower rates and slowly move to a more neutral stance. A neutral interest rate is whatever short-term interest rate would allow an economy to run at full employment and stable inflation.

Since lowering rates last month economic data continues to come in verifying a pretty healthy economy. Therefore, we expect one to two more 25 basis-point cuts before year-end, but believe The Fed is likely to take rates down slowly. So, how does the stock market typically perform once The Federal Reserve embarks on a rate cutting cycle? To answer that question, we can view the chart below from PGIM Investments.

AVERAGE RETURNS AFTER FIRST FED RATE CUT OF CYCLE

Source: Morningstar and S&P. Average excess returns versus ICE BoA 3-Month Treasury Bill Index (Cash) following the first Fed cut of the past seven cycles since 1984. S&P 500 Index (U.S. Equity), Bloomberg U.S. Aggregate Bond Index (U.S. Bond), Past performance does not guarantee future results.

The chart shows that following the start of the past seven rate-cutting cycles, bonds showed the most immediate benefits, cash yields decline in forward years as The Fed lowers rates and stocks outperformance grew in the years following the first cut.

The Fed has engineered a soft-landing for the economy…so far.

One reason volatility has increased, but not to the level we expected ahead of the election is that incoming data does continue indicating a still-growing economy, solid job market and lower inflation. Recessions almost always occur when The Fed embarks on a rate-hiking cycle, especially one as steep as we experienced. Yet, investors have gained confidence during the past several months that The Fed has done the unlikely - nudged inflation down without causing a recession.

So far, so good. However, we remain on guard that at some point in the future this could still result in a mild recession. Inflation is still above The Fed’s 2% target and with pretty strong employment there remains the possibility a strong consumer will result in inflation getting stuck above the 2% target. The Fed may then have to keep rates elevated, unable to lower them to levels they communicated during the September meeting. If individuals and businesses expect rates to fall further, they may put off taking out loans and spending money they would otherwise spend. This could still result in slowing economic activity enough to cause a recession – even if it is a mild one. Oly time will tell, but, we remain aware of this possibility.

While The Fed and economists try to do their best to read data, decipher it and come to conclusions the economy has many different inputs and variables and it is very difficult to get things precisely right. The Fed being astute and flexible in noting, acknowledging and responding to changes will be Important.

The flipped script may continue.

Each year experiences on average three to four pullbacks of 5% or greater. This year the market has experienced two, during April and July/August. During the usually higher volatile period of September and October pullbacks have been minimal. With the Presidential election approaching, tensions heated in the Middle East and around the world and stock market valuations elevated a more significant correction could still occur. Typically markets pull back ahead of elections due to uncertainty and then rally once the outcome is apparent or known. Since we did not get a correction ahead of the election it may pull back after the election regardless of who is elected. Without a meaningful pullback, any additional gains during the fourth quarter may be more muted to allow elevated stock market valuations to come down. The earnings season that kicked off the second week of October will likely be an influencing factor as well.

Pullbacks should provide good buying opportunities, particularly if we get a full 5%-10% correction, as we continue to be in a secular bull market.

Why investors should avoid responding emotionally to elections.

We have been through several elections as financial advisors. A few reminders about the limited impact of elections on stock markets:

Policy change takes time – Proposed legislation must pass through the U.S. House of representatives, The U.S. Senate and signed by the President to take law. That can take many months and a lot happens in the market during that time.
Election cycles are fraught with misperceptions, personal bias and exaggeration about how awful the opposing candidate will be, if elected. Dire predictions about how a candidate’s policies will negatively impact a particular sector often prove to be wrong also.
The president is only one of the many factors that influence the market. Macroeconomic factors and business profits matter more than the policies and ideology of who is president. The S&P 500 and Dow Jones Industrial Average have experienced long-term growth through many different presidents with different objectives and philosophies.
Diversification and long-term investing will benefit your portfolio. Making significant investment changes due to emotional decisions over an election will very possibly hurt your long-term performance and success as an investor.

As we live through these interesting times, we will continue e-mailing you invitations to informative webinars as they are announced, so be sure to update us any time your e-mail address changes. Please also visit our website www.raymondjames.com/hilliard and social media pages (listed below) for timely updates. We regularly post information from various sources including:

JP Morgan and other partner firms
Raymond James Chief Economist Eugenio Aleman
Raymond James CIO Larry Adam
Gibbs Capital Management

Facebook: https://www.facebook.com/hfgraymondjames

LinkedIn:

Eric Hilliard, CFP®, Branch Manager https://www.linkedin.com/in/ewhilliard/

Wade Stafford, CFP®, Associate Financial Advisor https://www.linkedin.com/in/ericwstafford/

Jenny Hilliard, Investment Executive: https://www.linkedin.com/in/jennyhilliardrj/

If any significant changes in your life or situation that could impact your financial plan arise, be sure to contact us. In the meantime, we continue to follow the processes we have developed over the years that enable us to provide you our very best.

Thank you for your trust in me and in our practice.

Sincerely,

Eric W. Hilliard
CERTIFIED FINANCIAL PLANNER™
Branch Manager

Trusted advisors, helping our clients invest, preserve, and distribute wealth since 1973.

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DJ GLB Aggressive Index - The DJ GLB Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Aggressive index is 100% of All Stock Portfolio Risk.

DJ GLB Conservative Index - The DJ GLB Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Conservative index is 20% of All Stock Portfolio Risk.

DJ GLB Moderate Aggressive Index - The DJ GLB Moderate Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Aggressive index is 80% of All Stock Portfolio Risk.

DJ GLB Moderate Conservative Index - The DJ GLB Moderate Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Conservative index is 40% of All Stock Portfolio Risk.

DJ GLB Moderate Index - The DJ GLB Moderate is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate index is 60% of All Stock Portfolio Risk.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The S&P 500 Equal Weight Index (EWI) is the equal-weighted version of the widely used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance. Keep in mind the individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. MSCI Emerging Markets Index is designed to measure equity market performance in 24 emerging market countries. The index’s three largest industries are materials, energy and banks. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance which include both U.S. and non-U.S. corporations. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The performance noted does not include fees or charges, which would reduce an investor's returns. The Magnificent Seven is a group of companies including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. Raymond James makes a market in these stocks. This is not a recommendation to purchase or sell the stocks of the companies mentioned. Bond Prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

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