Where does the market go from here?
As we move towards the end of 2024, the main drivers of share prices and market volatility will continue to be monetary policy and the soft versus hard versus no-landing argument. We look at the coming months with guarded optimism but expect the ride could be a bumpy one. The recent moderation in inflation allows the Fed to move its focus more towards labor market trends. The employment picture has weakened since the start of 2024. New job growth is down, and unemployment has moved above 4.0%. A recent JOLTS (Job Openings and Labor Turnover) Survey showed that available jobs fell to 7.67million – the lowest level in almost 4 years. Weekly unemployment claims, while still low, have moved higher each quarter: 211,000 (Q1), 222,000 (Q2) and 232,000 (Q3). In contrast, we must add to this picture a US consumer willing to maintain reasonable spending, recent strong economic growth (GDP growth in Q2 was 3.0%) and a good corporate earnings outlook. In August, at the Jackson Hole Economic Symposium, Chairman Powell said this, “The cooling in the labor market conditions is unmistakable. It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in the labor market.” Notwithstanding, it is the strength of the labor market that may very well allow the US to avoid recession and have the much-anticipated soft landing, defined “as a moderate slowdown in economic growth with a controlled reduction in inflation.”
Rate cuts are coming! The loosening of monetary policy is not easy – If the Fed cuts rates too soon, it risks a possible return of damaging inflation. If it cuts too late (or not enough) it could miss a soft landing and trigger a painful recession. Against all odds, we continue to see a soft landing in our future. What do rate cuts mean for our portfolios? Typically, interest rate cuts are good for the stock market. Over the last 50 years and 8 rate cut cycles, the S&P 500 has risen 6 of 8 times (exceptions are 2001 and 2007) for an average return (12 months after first rate cut) of +10.67%. A market sector rotation is already underway - 2024 first half leaders Technology (+28.24%) and Communication Services (+26.68%) became sector laggards in the 3rd QTD, returning just -5.13 and +0.46% respectively. Real Estate (which has performed poorly over the last 2 years) is the sector leader thus far in Q3 with a strong showing of +13.09%. On the fixed income side, investors have begun to move away from shorter duration exposures into intermediate core exposures in anticipation of monetary policy loosening this fall.
Are we forgetting something? How about the upcoming presidential election and its possible impact on the market? The prevailing wisdom is that presidential elections add political instability and uncertainty to the mix of other factors (like monetary policy, GDP growth and unemployment) that may already be impacting the market. In 16 presidential election years since 1960, the S&P 500 has fallen just three times: 1960 (-3.0%), 2000 (-9.1%) and 2008 (-37.0%) as each of these years followed recessions in the previous year. The average annual return for the 16 presidential election years is +9.2%, slightly better than the overall period average return of +8.9%. It is interesting to note that the market fares better in an election with an incumbent versus an open election. How about an election between a former President and incumbent Vice President? Analysis by sector shows that while most sectors advance during an election year, there are three (Technology, Materials and Communication Services) which show, on average, small declines. While election results can ultimately impact government policy, laws and foreign relations, history suggests, however, that election outcomes typically have only a moderate impact on short-term market performance.