2024 September Market Update
Stocks continued their advance in September, with the flagship S&P 500 posting yet another all-time high in the final week of the month. Catalyzed by the first (of potentially multiple) rate cuts, bond prices also gained, accelerating their positive inflection from one of the longest bear markets in history. Equity strength continued to broaden, and for the quarter, the “average” stock in the S&P 500 almost doubled the return of the broad index. With “Mega Tech” companies still trading at stretched valuations, it’s crucial for lagging stocks and sectors to continue making gains for the overall market to keep climbing.
This month, the Federal Reserve delivered a mild surprise by announcing a 50-basis point (0.50%) rate cut instead of starting this new easing cycle with a 25-basis point trim. The move signals their confidence that most inflationary pressures plaguing the domestic economy over the past few years are abating. With underlying indicators also suggesting the economy remains resilient, markets have coalesced around a belief that the US economy is securely on the path to a “soft landing.” A successful soft landing suggests a normalization of both the GDP and inflation growth rates (both in the low-single digits) rather than a sharply negative growth inflection in the domestic economy. Such an outcome has rarely been achieved by previous Fed administrations, which is likely why stocks have continued to positively surprise, and through September, are outpacing consensus Wall Street S&P 500 price targets by almost 20%!
The beginning of a rate cut cycle has historically ushered in relative outperformance for more defensive companies and dividend payers. is the outperformance is intuitive, as rate cuts are generally spurred by a weakening economy, conditions in which investors are most likely to flock to those less sensitive to economic fluctuations, such as Consumer Staples, Utilities, and Healthcare companies. These sectors also harbor some of the biggest dividend payers, and dividends become more attractive as rate cuts reduce yields on bonds, cash, and, cash alternatives. Broadening stock market strength (328 names in the S&P 500 outperformed the index in the 3rd quarter) likely anticipates this dynamic.
These trends could continue throughout the rate cut cycle (current expectations are for 2% in cumulative easing by December 2025), but consider the unique environment surrounding this first rate cut. The inflationary pressures of the past few years have largely been attributed to sources even the Fed has admitted they have little ability to influence. Amid debates on whether raising rates could address pressures from pandemic-driven supply and demand distortions, the Fed ultimately increased rates to their highest levels in 17 years. While this has certainly curtailed economic activity and dampened sentiment to a degree, the economy remains much firmer than generally seen at the start of a rate cut cycle. Economic indicators suggest a comfortable, albeit cautious, consumer and a resilient business environment with generally stable margins and record profit expectations. Mindlessly following the legacy playbook of a “normal” falling rate environment could leave a portfolio underexposed to upside from future economic growth. Conversely, remaining over-allocated to Growth stocks trading at historically stretched valuations could prove perilous if the economy falters and a “soft landing” becomes unattainable. Investors should continue to seek balance in their portfolios and prepare for a variety of outcomes rather than chasing the market narrative du jour. As always, we will spend less time trying to divine what could happen in the world at large and focus more on individual company execution and valuation.
Although bond yields may have recently decreased in anticipation of Fed easing, their initially high levels could still provide returns that are competitive with reasonable stock market expectations over the next few years. Unlike 2022, bonds have been acting as more of a risk hedge during recent bouts of stock volatility, which could continue if inflation remains under control.
Much of the media attention over the next month will be directed toward the upcoming elections. We will certainly examine the nuance of any policy implications from the various combinations of Presidential and Congressional election results, but ultimately politics are largely inconsequential for investment markets. Investors who make decisions solely based on political outcomes (and leanings!) have historically paid the price. Starting with $1,000 in 1953 (the inauguration of President Eisenhower), investors who only invested during either Democrat or Republican presidencies would have less than $75,000 today. Meanwhile, one who remained fully invested during both would have accumulated over $1.7 million.
Time in the market and staying invested matters more than anything else. The stock market is often compared to a casino by fearmongers and, in some cases, scam artists. Short-term movements in markets are obviously unpredictable and geopolitical events can trigger volatility, yet historical results show that stocks function in the opposite manner of gambling with chips and cards: the longer one sits at the investing table, the better the odds of success. Since 1928, only 62% of the time has the S&P 500 Index posted a positive return over a one-month timeframe. This percentage jumps to 75% over a one-year period, 90% over a five-year window, and reaches 100% once the time horizon stretches past 15 years.
At The Wise Investor Group, we will always espouse the virtues of staying invested, regardless of developments over the next month, year, or decade. However, such philosophy should be nuanced and integrated with your specific financial circumstances, goals, and objectives. Let’s stay connected as we enter the last quarter of the year and work through this process together!
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the Wise Investor Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that 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. Past performance may not be indicative of future results.
