2024 Third Quarter Stock Market Update
Climbing the Wall
October 2024
The third quarter brought more gains to equity investors. The S&P 500® Index returned 5.9% and the Russell 2000® Index advanced 9.3%. Notably, gains broadened to corners of the market other than large cap technology stocks. Year-to-date returns are somewhat staggering in light of persistent calls for economic weakness and market malaise. Incredibly, both the S&P and Dow Jones Industrial Average have been positive for 10 of the last 11 months. The S&P 500 is now up a whopping 22.1% for 2024. Other notable indices are also up nicely, albeit a bit more subdued than the tech-heavy S&P.
There were a couple sharp pullbacks during the quarter. Signs of consumer duress, rising unemployment (although still low by historical standards) and slowing economic growth gave way to recession fears. In fact, it seemed the sky was falling just a few weeks ago. The Nasdaq Composite was down 13% in a month, the Russell 2000 had declined over 3% three days in a row and the S&P was about 10% off its highs. Ultimately, stocks managed to shrug off fears and charge to new highs. There’s an old saying that stocks “climb a wall of worry”. This has certainly proven to be the case in 2024.
It hasn’t all been sunshine and roses for the market. As discussed in recent letters, large technology stocks tethered to the artificial intelligence (AI) theme have dramatically outperformed in 2024. However, many more cyclical areas such as industrials, transports, energy and consumer discretionary have struggled due to broader economic fears. Smaller cap stocks, which are generally more economically sensitive, have also lagged significantly (the Russell is up 11.2% YTD). We saw some of these areas perform better in the last quarter, but they could have more recovery potential if we are indeed headed for a soft landing.
Did someone say soft landing? Enter the Federal Reserve. After tremendous buildup and speculation, the Fed cut its benchmark interest rate 50 basis points on September 18th. This was the first rate cut since Covid in March 2020 and followed a long string of raising interest rates in an effort to tame high inflation. The Fed has a dual mandate of subdued inflation and full employment. With inflation down to 2.5% year-over-year, the focus now shifts to the employment side of the equation and avoiding a recession. Rate cuts are currently expected to continue through next year.
It may seem unusual to start lowering interest rates in the absence of any crisis and with economic conditions still okay. Indeed, GDP growth clocked in at 3% in the second quarter. However, the Fed wants to stay ahead of any potential weakness and views rate cuts as “recalibrating” policy to a more neutral level following a period of more restrictive policy. For sure, the likelihood of an economic “soft landing” has improved alongside the commencement of easier monetary policy. This is a good thing for stocks.
Now for the obligatory mention of politics. Sigh. The presidential election is quickly approaching. In coming weeks, we will be inundated with political advertising and extreme rhetoric. It’s a tight race that has been a source of anxiety for investors on both sides of the aisle. Different sectors/stocks could fare differently under different administrations, but it seems futile at this juncture to speculate on potential outcomes. That said, we think some of the more extreme scenarios/business impacts associated with either candidate are often overstated. This would be especially true if a divided Congress brings gridlock. Perhaps the best thing will just be getting the election over with so we can move on.
With politics out of the way, investors’ focus will likely return to economic growth and the Fed. Easier monetary policy and a “Goldilocks” economy (i.e. not too hot and not too cold) could be supportive of stocks going forward. It is worth noting, however, that the S&P 500’s valuation already looks pretty full at roughly 21x earnings estimates for next year. Justifiably, this may lead one to conclude the market’s price levels are relatively fair and its risk/reward profile balanced.
As touched upon previously, there are still many stocks (especially more cyclical names) that are far from their highs and trading at sharp discounts to the large cap technology leaders that dominate the S&P (5 stocks alone comprise 26% of the index). To wit, the equal-weighted S&P 500 trades at 16.7x next year’s earnings estimate. This is not to say that we don’t like the large tech leaders. We just point out that risk/reward profiles may be more favorable elsewhere in a backdrop of lower interest rates with decent growth.
Sincerely,
George L. Smith III, CFA®
Chairman, Investment Policy Committee
| Market Returns | Q3 2024 | YTD |
| U.S. Large Caps | 5.9 | 22.1 |
| U.S. Mid Caps | 9.2 | 14.6 |
| U.S. Small Caps | 9.3 | 11.2 |
| International Developed Markets | 7.3 | 13.0 |
| Emerging Markets | 8.7 | 16.9 |
| Intermediate Term Bonds | 4.2 | 4.7 |
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Important Disclosures
Diversification and Asset Allocation does not ensure a profit or guarantee protection against a loss. Any opinions expressed here are statements of judgment on this date and are subject to future change without notice. This information may contain forward looking predictions that are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. There is no guarantee that a company will continue to pay a dividend. The investment return and principal value of an investment will fluctuate. Small and mid cap company stocks may be more volatile than stocks of larger, more established companies. The portfolios may invest in foreign securities which are subject to additional risks such as currency fluctuations, political instability, differing financial standards and the potential for illiquid markets. The information provided in this letter should not be considered a recommendation to purchase or sell any particular security.
Performance shown is historical and is no guarantee of future results. Investing in securities carries risk including the possible loss of principal.
Data as of 9/30/2024 ©2024 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) maynot be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Index Definitions: U.S. Large Caps represented by the S&P 500 Index. U.S. Mid Caps represented by the Russell Midcap® Index. U.S. Small Caps represented by the Russell 2000® Index. International Developed Markets represented by the MSCI EAFE Index. Emerging Markets represented by the MSCI EM Index. Intermediate Term Bonds represented by the Bloomberg Intermediate Government/Credit Index.
The S&P 500 Index is comprised of 500 U.S. stocks and is an indicator of the performance of the overall U.S. stock market. Standard & Poor’s Financial Services LLC, a division of S&P Global, is the source and owner of the registered trademarks related to the S&P 500 Index. The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000® Index, representing approximately 8% of the total market capitalization of the Russell 3000. The Russell 1000 Value Index measures the performance of the Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000 Growth Index measures s the performance of the Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000®, which represent approximately 25% of the total market capitalization of the Russell 1000. London Stock Exchange Group PLC and its group undertakings (collectively, the “LSE Group”). © LSE Group 2024. FTSE Russell is a trading name of certain LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote/sponsor/endorse the content of this communication. The Morgan Stanley Capital International Europe, Australia and Far East (MSCI EAFE) Index is an unmanaged index composed of the stocks of approximately 1,000 companies traded on 20 stock exchanges from around the world, excluding the U.S., Canada, and Latin America. The Morgan Stanley Capital International Emerging Markets (MSCI EM) Index is a capitalization-weighted index of stocks from 26 emerging markets that only includes issues that may be traded by foreign investors. The reported returns reflect equities priced in US dollars and do not include the effects of reinvested dividends. The Bloomberg Intermediate Government/Credit Index is an unmanaged index composed of debt securities with maturities from one to ten years issued or guaranteed by the U.S. Treasury, U.S. Government agencies, quasi-federal corporations and fixed rate dollar denominated SEC-registered corporate debt that are rated investment grade or higher by Moody’s Investors Service and Standard and Poor’s Corporation or Fitch Investor’s Service, in that order. The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. The Nasdaq Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. It is a broad index that is heavily weighted toward the important technology sector.
An investor cannot invest in these indices and their returns are not indicative of the performance of any specific investment.
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