Market Recap – October 2024: Broad markets were down during October, but that should not be a surprise to investors, as it tends to be the worst month in an election year. But, on the flipside, what also shouldn’t surprise investors is that there tends to be strength in November, as this is the best month of an election year. Even taking it a step further, the three-month period from November through January has traditionally been the strongest three months for the market. On the fixed income side, bonds performed poorly as rates rose across the board, as the market has begun pricing in a positive term premium, as deficit spending continues to be the playbook for both candidates. The noticeable trend continues to be that bonds and stocks are positively correlated, and that fixed income may not provide insulation during periods of volatility. For example, in October, bonds were down -2.48%, while stocks were only down -0.92%.
The Topic of the Month – Bonds: Coming off their best rolling twelve-month performance since 1984, bonds had difficulty continuing their momentum, underperforming risk assets on the downside. With rates beginning to price in some sort of term premium, many investors worry that this is a bad sign for stocks. During October, rates rallied >65 basis points, a magnitude of change (30-day rolling) exceeded in only 4% of trading days since 1962; although 65 bps increase over 30 days has occurred 47 other times when using reset below zero to eliminate repeats, none took place in tandem with Fed’s initial rate cut until now. The S&P 500 rallied consistently across all time of these time frames, culminating in a 100%-win rate over the next year. The market’s ability to absorb a sudden/sharp rise in yields suggests that economic fundamentals were healthy during these periods, providing a positive backdrop for equities.
The 2-YR Anniversary of the Bull Market: In the words of Winston Churchill, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Historically, when a bull market gets to two years old, which it did in October 2024, there tends to be continued momentum. In fact, since 1950, every bull market that has made it past two years old had a minimum duration of 5 years. However, the third year of a bull rally tends to see one of the weakest annualized returns.
EOY Seasonality Tends to be Strong: We’ve continued to hear that investors want to sell ahead of, or after the election, i.e., short-term nervousness. We’ll let the stats speak for themselves:
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- The median S&P 500 return from October 27th to December 31st is +5.22% since 1928
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- The median S&P 500 return from October 27th to December 31st in election years is +6.25% since 1928
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- The median NDX return from October 27th to December 31st is +11.74% since 1985
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- The median NDX return from October 27th to December 31st in election years is +7.17% since 1985
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- The median RTY return from October 27th to December 31st is +7.99% since 1979
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- The median RTY return from October 15th to December 31st is +9.88% in election years since 1979
Fed in Focus: The economy has performed better than most expected, which suggests the Fed could have had room to cut rates more gradually than the recent 50bp move. The larger-than-expected rate cut suggests that the FOMC is trying to be more preemptive rather than passive in responding to signs of a cooling labor market. This makes sense given how far the Fed Funds Rate (“FFR”) is above what the Fed thinks is the neutral rate of 2.5% – 3.0%. The November meeting is pricing in a 0.25% hike.
The Power of Operating Leverage: Expectations for 2025 are for margins to reach a record high of 13.9%, more than 1% higher than any margin point in the last 35 years. The previous high was 12.4% in 2021, during a period of reduced costs due to economic closures and government stimulus. Many investors believe that meeting these higher margins amid rising costs will be a challenge moving forward, but it just shows how the U.S. economy has evolved over the past few decades. Specifically, U.S. Large Caps, have a lot of embedded operating leverage within their constituents. That is why the market can estimate 5% sales growth in ’25, coupled with 15% earnings per share growth. This is the power of economies of scale, and the margin opportunity that U.S. Large cap stocks have. This is the indices exact competitive advantage over the rest of the world.
The Presidential Election Year: Since ‘44, the S&P 500 has not declined in a year in which an incumbent president was running for re-election (avg. return of 16%). Stocks have declined in presidential election years, but in each of those cases it was a year in which there was an open election with no incumbent running (‘60, ‘00, and ‘08). Presidents want to be re-elected and will use whatever policy levers are needed to boost the US economy. In fact, every president who avoided a recession two years before their re-election went on to win election. And every president who had a recession in the two years before their re-election went on to lose. As of July, the incumbent is no longer running for president, but that doesn’t mean that the tool chest of liquidity will not be utilized to insulate the market, in case volatility shows its unwelcomed face.
A Bond Statistic that May Surprise Investors: Investors should be mindful that long duration exposure comes with equity-like volatility, with 9 of the last 12-years seeing long duration Treasuries post a larger intra-year decline than the S&P 500.
S&P 500 EPS: ’25 (Exp.) EPS = $275. ‘24 EPS = $239 (+15.1%). 2023 = $220 (+8.6%). 2022 = $219 (+0.5%). 2021 = $204.*
Valuations: S&P 500 Fwd. P/E (NTM): 21.4x, EAFE: 14.1x, EM: 12.1x, R1V: 16.9x, and R1G: 27.6x. *
*Source: Bloomberg and FactSet, Data as of 10/31/24
Disclosures
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This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.
The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities. ACA-2411-2.
