“Have an opinion on what the market should do but don’t decide what the market will do.” – Bernard Baruch
In a Presidential election year, November has historically been positive for the stock market. November 2024 held the trend, with all the US indexes we follow posting positive returns. Small companies led the pack, with the S&P 400 (Midcaps) and the S&P600 (Small Caps) posting gains of 8.78% and 11.30%, respectively. Global stock indexes lagged, with the regression of the MSCE World and MSCI Emerging Market indexes. Commodities, bonds, and the US Dollar indexes were positive.
All data as of 12/02/2024, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
The month of November was an interesting one around the office. As we do every four years, we field our fair share of questions regarding the implications of the election results on investments. In the near term, the stock market has been on a tear. The reactions we have heard from clients and prospects have generally been either glee, concern, or confusion. None of this surprises us.
In our November letter, we addressed our thoughts on how politics might affect the stock and bond markets. Briefly, we see three policy areas as important to investors: trade and tariffs, tax policy, and deregulation efforts. Because making policy is no easy task, we approach 2025 with an open mind.
This month we wanted to get back to basics and review where the various markets we follow as we enter the last few weeks of 2024. Let’s dig in…
Market Review
Stock market investors should be happy with their returns as we close in on year-end. As of December 1, 2024, the S&P 500 is up more than 26% for the year. The commentary we hear in many circles focuses on the fact that the S&P 500 index is up more than 25% for the second year. Our perspective is a little different. As we show in Chart #1, we view this year’s performance of the S&P 500 as a breakout from a 2-year consolidation that started in early 2022 through the beginning of this year. While we expect the market to continue higher, we are concerned this powerful market run will lead to a correction in the first half of 2025.
Chart #1: www.stockcharts.com Data 01/01/24 – 12/09/24 as of 12/09/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
The 10-year US Treasury yield chart tells us a different story. In 2022 as the stock market corrected, yields increased from below 1.5% up to 5% at its peak, before settling into a wide range between 3.6% and 4.8%. We have found it interesting that with the Federal Reserve in a rate cutting cycle, longer-term yields have not broken below this range. Given the strong economic numbers and inflation settling in around 2.5%, we are not surprised that longer rates have remained relatively high. It is important to remember that the Federal Reserve (The Fed) sets the short-term rates, with longer-term rates set by the markets. Because of this dynamic, we believe the 10-year Treasury yield will be a key indicator of where the economy and investments are heading in 2025. A drop in rates would indicate to us a weakening economy. Steady to higher rates would indicate continued or increasing economic strength.
Chart #2: www.stockcharts.com Data 01/01/24 – 12/09/24 as of 12/09/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Moving onto the US Dollar Index, we believe the index is at a pivotal point. As Chart #3 shows, the index has been in a range since the beginning of 2023 between 100 and 106. The 106 level was pierced in November before settling back around 106. A move lower would be good for US companies that export and company profits from overseas operations. A move higher would be a headwind for both exported goods and profitability for multinational corporations.
Chart #3: www.stockcharts.com Data 01/01/24 – 12/09/24 as of 12/09/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
2025 Stock Market Projections
Most major firms come out with their market predictions for the following year during the month of December. In general, these forecasts are positive. As part of that process comes the target price for the S&P 500. As of December 6, 2024, here is a sampling of what Wall Street is predicting:
- UBS 6,400
- Morgan Stanley, Goldman Sachs 6,500
- Barclays 6,600
- HSBC 6,700
- Deutsche Bank, Yardeni 7,000
- Wells Fargo 7,007
We bring this up because yearly stock market projections from major investment companies are often met with considerable interest by investors seeking guidance on future market performance. In our opinion, it is crucial to recognize that these projections, while engaging, often lack substantive informativeness. The dynamic nature of financial markets is influenced by myriad factors including economic indicators, geopolitical events, and shifts in investor sentiment, which can render predictions both speculative and imprecise. Consequently, while these forecasts may provide a snapshot of analysts’ opinions based on current data, they do not account for unforeseen variables that could significantly alter market trajectories. We approach such projections with caution, focusing instead on comprehensive analyses and long-term strategies.
Final Thoughts
What will the stock market do in the months ahead? We have opinions on what SHOULD happen given the current setup, but those are just opinions. Markets move based on multiple factors. The world is complex. Single factor analysis is useless.
The stock market has been moving higher in what feels like a Goldilocks environment with strong corporate earnings projected to continue as the Federal Reserve cuts short-term interest rates. Add in the promises of a relaxed regulatory environment and you have what appears to be a trifecta for a bullish setup for the stock market. Given our view that inflation volatility is heightened due to increased protectionism, government debt levels, and geopolitical tensions in Europe and the Middle East, we see several possible roadblocks to sustained market growth.
First, the potential for rising inflation could lead to a reassessment of monetary policy, prompting the Federal Reserve to reverse course on interest rate cuts if economic conditions shift unexpectedly. Second, the global landscape remains fraught with uncertainty; developments in trade relations and geopolitical tensions could disrupt supply chains and impact corporate profitability as European economies are struggling. Finally, the consequences of elevated government debt levels may constrain fiscal policy options, limiting the government’s ability to stimulate the economy during downturns. As such, while the current environment may present attractive opportunities, we remain aware of these potential headwinds when making investment decisions.
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On behalf of Magellan Financial, we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com