2024 4th QUARTER INVESTMENT BULLETIN
EXECUTIVE SUMMARY
The Market
Stocks and bonds continue the 2023-2024 market rally despite a 9% pullback in the S&P 500 in late July and early August. The S&P 500 and Aggregate Bond Market index each rose more than 5% during the previous three months. (see Charts 1 & 2)
Market leadership rotated in a meaningful way with Mid and Small-Cap stocks rising more than 9%, and international stocks, both developing and emerging markets, beating the S&P 500. (see Charts 1 & 2)
Further, eight of eleven sectors outperformed technology stocks during the quarter, some sectors by a significant margin. (see Chart 3)
The Fed
The Federal Reserve rate hiking cycle appears to be over. With a 50-basis point rate cut in September, the FED decreased rates for the first time since 2020. This first rate cut follows 11 interest rate hikes between March of 2022 and June of 2023.
The decision to cut interest rates has been made possible by a drastic reduction in inflation that had hit as high as 9% in mid-2022 and is now 2.5%.
Politics
We are in the middle of another presidential election cycle that as of now has not impacted the markets whatsoever.
CHART 1:
CHART 2:
CHART 3:
Inflation Declines and the Federal Reserve Cuts Rates
As long as inflation remains under control, it is likely that interest rates will continue to move lower. Inflation had been non existent for many years prior to the pandemic, but sharply accelerated beginning in 2021. The core inflation rate hit a troublesome high of 9% in mid-2022. The Federal Reserve took swift action to combat inflation by raising rates 11 times. In the first chart below you can see the dramatic increase in inflation and subsequent decline in inflation. In the 2nd chart, you can see the FED action to increase interest rates to combat inflation.
Inflation Rate: 2020 - 2024
Fed Funds Rate: 2021 and beyond
Politics and the Stock Market
We are in the midst of another contentious presidential cycle. Our country has become increasingly partisan, and the political divisions that exist can lead some investors to feel as if their financial success is contingent upon their preferred candidate or political party prevailing. However, mixing long-term investment strategy with partisan politics rarely succeeds. As you can see from the chart below, in both Democratic and Republican administrations, stocks have advanced and in most instances the value of the stock market is higher at the end of either party’s tenure in office.
Forward looking
Stock Market Outlook
As the market continues to make new highs seemingly on a daily basis it is inevitable that price becomes stretched relative to the earnings that companies are able to generate. We frequently incorporate the chart on the next page into our analysis of whether the stock market is over or under-valued. This chart is a favorite because it clearly contrasts price and earnings growth. When the light blue line, which is the S&P 500 price, stretches above the dark blue line, which is earnings growth, it is illustrating that the market is becoming increasingly overvalued. The opposite is true when the light blue line falls beneath the darker line.
Bond Market Outlook
The bond market and interest rates have an inverse relationship, which means that when interest rates increase, bond prices fall, and when interest rates decrease, bond prices rise. The inverse relationship becomes more pronounced with longer term bonds. With the first interest rate cut in September, and the expectation of more in the coming months, it seems that bond prices have a strong chance of increasing in the future. In that environment, longer term bonds will be more profitable than shorter-term bonds. Additionally, as interest rates increased during 2022 and 2023, we utilized more fixed rate investments, such as CD’s and Treasury bonds. With lower interest rates and the probability of further declines, it is our expectation that we will incorporate less CD’s and Treasury bonds and invest in more intermediate and long-term bond funds or ETFs.