
S&P 500: Best Start to a Year Since 1997
US stocks are off to their best start to a year since 1997. US equities are on a five-month winning streak, in part to a broadening of the market and the Fed cutting interest rates for the first time since 2020. In looking forward, the market is entering a seasonally strong period but will have to contend with volatility around the US Election.
Bull Market has been Led by Mega-Caps
Recap of Third Quarter 2024: Change of Leadership
Recap of Third Quarter 2024: What Changed?
Market (and Fed) Shifting Focus to Labor Market
Fed is Forecasting 200 Bps of Cuts by Year-End 2025
Election: Battleground States to Decide the Presidency
Election: Democrats Defending More Seats in Senate
Election: Market Focused on Taxes, Trade and Deficits
Despite the many issues on the ballot this November, we believe some of the most important issues for markets revolve around 1) Taxes, 2) Trade and 3) Deficits.
Investment Implications
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Expect an Additional 50 Bps of Cuts by Year-End:
Not only did the Fed cut rates in September for the first time since 2020, but they cut by 50 basis points. The jumbo cut was a signal on the Fed’s intent to not “fall behind the curve.” The September Fed meeting also provided an updated “Dot Plot,” which showed a majority of FOMC members expect an additional 50 basis points of cuts in 2024. With two Fed meetings left in November and December, current market odds agree with the Fed.
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Equities May Struggle in the Leadup to the Election:
September-November is historically the weakest 3-month stretch for equities in a Presidential Election Year. While the S&P 500 rallied 2.1% in September, a big contributor was the Fed’s jumbo rate cut (50 bps). The Fed’s next meeting is not until after the election and equity valuations are elevated. We also could see added volatility if we do not have a declared winner for days or weeks. On a positive note, US equities historically rally after the Presidential Election into year-end.
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Strong Q1 Returns (+10%) Historically Bullish for Rest of Year:
This is just the 10th time since 1970 the S&P 500 had 10+% returns in the first quarter to start a year. In the previous nine occurrences, the S&P 500 had a median return in the third quarter of 1.9%. The S&P 500 was able to surpass this, finishing the third quarter up 5.9%. In looking at the fourth quarter and full year returns in these years, the S&P 500 had median returns of roughly 8% and 28%, respectively. In fact, none of these years produced a single negative calendar year return.
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Bond Market Pricing in Too Many Cuts:
We believe there is a disconnect between the bond & equity markets. Equities remain near all-time highs but the bond market is pricing roughly 200 basis points of cuts over the next year (according to the 2-year Treasury yield). We believe bond market pricing is overdone and yields have dropped too far in anticipation of a quicker cutting cycle. The economy remains resilient but inflation may be sticky. As highlighted in our last quarterly outlook, we prefer short-to-intermediate bonds in the fourth quarter.
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Chinese Stimulus May Mark a Turning Point:
In late-September, Chinese equities posted their best week since 2008 after the government announced a massive stimulus package (highlighted to the right). As a reminder, China has been stuck in a lengthy downturn due to a property crisis, deflation and weak consumer confidence. In our view, the magnitude of this stimulus is reminiscent of US stimulus provided in March 2020 by the Fed and US government. Ultimately the size of this stimulus and commitment “to do more” may help finally stabilize the Chinese market.