2024 October Market Update
The S&P 500 achieved yet another all-time high in October before mildly receding into the end of the month. Investors continue to show confidence in the resilience of the economy, as solid read outs from GDP, Consumer Spending, and other macroeconomic data support the soft-landing narrative. However, signs of potential trouble beneath the surface are increasing.
We should expect oscillations between positive and negative sentiment in a successful soft-landing environment. Data that is exclusively positive would suggest the economy is still running too hot (and inflationary), while too many negative data points would fuel concerns of a pending recession. Increasing market volatility over the past few weeks reflects this tug of war from one day to the next and represents a healthy discounting of various outcomes.
As we enter the peak of the 3rd Quarter Earnings reporting season, the market is broadening, with a rotation from the largest companies, including tech giants, into more ‘average’ stocks. Despite being somewhat underwhelming compared to the broad-based earnings beats of recent quarters, the S&P 500 is still projected to increase its bottom line by over 4% from the same period last year.* Financials have posted the strongest results relative to expectations. The largest, most dominant banks kicked off this earnings season with reports highlighting resilient corporate activity and the strength of the consumer. Yet, investors continue to receive conflicting signals as other cyclical sectors such as Energy, Industrials, and Materials have largely disappointed.
Mixed economic data has also helped elevate volatility in the bond market, where yields have moved higher (and prices lower) since the Federal Reserve cut the target rate by a half point. The Fed only controls short-term rates, whereas longer term rates can be influenced by any number of factors, including inflation expectations, outlooks for economic growth, and even who wins the Presidential election. Although it might seem contradictory for rates to move higher given the Fed’s shift to a less restrictive monetary policy, bonds could merely be unwinding the “recession trade” and pricing in a more measured pace for rate cuts than initially anticipated. This could echo the soft-landing of 1995, in which the economy avoided a recession. Treasury yields initially spiked only to gradually drift lower over the following 12 months.
Stocks can survive extended periods of higher rates as long as they reflect solid economic growth. Strong company fundamentals (buoyed by record profit margins) and a conducive macroeconomic backdrop continue to support equities, even in the face of lofty broad index valuation levels. An increasing number of stock market prognosticators have significantly lowered their long-term return projections for the S&P 500 in response to these valuations. However, if one backs out the largest ten or so names that heavily influence the index, or consider the index on an equal-weighted rather than size-weighted basis, a much different picture emerges. Valuations are much more reasonable beyond the top 10 and closer to historical averages. Since 1990, the Equal-Weighted S&P Index – maybe the best representation of the “average” stock” - has outperformed the more traditional index. After an extended period of domination by the latter in recent years, fueled by the massive outperformance of large US-based Technology companies, it would not be surprising to see some reversion to the mean. Maybe Modern Portfolio Theory and other allocation concepts that espouse the merits of diversification will have their day again in the not-so-distant future. At the very least, there remain compelling opportunities at the individual stock and sector level.
Everyone knows the political environment remains highly contentious and we hope for a safe and fair election next week. We also continue to caution on the potential perils of making sweeping portfolio moves in response to political outcomes. Secular trends and company fundamentals largely detached from political influence drive the bulk of long-term equity performance. Recent correlation between certain stock price movements and election odds might suggest some closer relationship. However, such anticipated outcomes are often priced in before election day and, of course, may not even prove to be accurate. Historical stock market sector performance during Democrat or Republican presidencies reveals no discernible pattern. Sometimes the exact opposite outcome emerges versus what might have been expected by the political rhetoric. For example, who might have guessed that Coal-related stocks would have significantly outperformed “Green” names under Biden while the reverse was true under Trump?
Amidst any potential market (or societal!) volatility, we want to reaffirm our unwavering commitment to you and our ongoing efforts. We wish you and your loved ones a joyous start to the Holiday season and look forward to connecting soon!
*Source: Strategas Earnings Summary
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 of Raymond James and not necessarily those of Raymond James.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
