“History shows us, over and over, that bull markets can go well beyond rational valuation levels as long as the outlook for future earnings is positive.”
– Peter Bernstein
Normally a hard month for investors, September was positive almost across the board for all the indexes we follow. The lone exception was the US Dollar Index. The weakness in the dollar helps explain some of the strength in the MSI World and MSCI EAFE indexes. Exceptional strength in the MSCI Emerging Markets Index is a result of the weakening dollar and rate cuts from the US Federal Reserve (The Fed). US indexes were up modestly, as were bonds.
All data as of 10/01/2024, 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.]
September 30 was not just the end of the month, but also the end of the third quarter. Bucking the historical trend of weakness, the third quarter ended with the S&P 500 up about 5% this quarter, setting a new all-time high on the final trading day. For the year the index is up 20.81% and has recorded 42 record highs. The month ended with strength in the stock market.
If you have been following our analysis for any length of time you should know that we are not perma-bulls or perma-bears, but very pragmatic in our market analysis. While history has shown the stock market has an upward bias, we understand that both secular and cyclic bear markets happen. So, with all the strength we are witnessing in the current environment, we do have to ask two questions: why is the stock market strong? And how long can the good times continue for the stock market?
Chart #1: www.stockcharts.com Data 01/01/24 – 09/30/24 as of 100/01/24. 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.
Why has the stock market been so strong?
The post-Covid investment cycle has been rather unique. Massive government stimulus, supply chain issues, increased inflation levels, and the fastest increase in interest rates since the 1970s have all contributed to the current economic cycle. When we were all at home in lockdown many used their stimulus checks to make purchases of goods as access to services like restaurants and travel were severely restricted. Then the world opened with a consumer rush for the services that were unavailable during the lockdown. The result was inflation in goods followed by inflation in services. We believe that much of the economic distortions are out of the system and the economy is normalizing.
We also believe there are sound reasons for the current strength in the stock market:
Corporate Earnings Growth: At the end of the day, we believe the stock market moves higher or lower based on the perception of future earnings for the stock market. What happens on a daily, weekly, or even monthly basis we consider to be noise, more about investor emotions than corporate earnings. According to Wells Fargo Investment Institute, year-end 2025 S&P 500 earnings are expected to jump more than 10% to $270.
Soft Economic Landing: The last time an economic cycle ended in a soft landing, not an economic recession, was in 1994. Back then, inflation was moderating, payroll growth slowed, and the unemployment rate ticked higher. If that sounds familiar, it should for two reasons. The first is that these factors often precede economic recessions. The other reason is that is exactly what is happening today. From our vantage point, concern for the economy among clients and prospects kicked into high gear on the August 21, 2024 with the release of a BLS Report with jobs data revisions for the 12-month period ending in March 2024 showing a decrease of 818,000 jobs.¹ Given the current economic growth trends remain above the 2.0% to 2.3% range, we believe the current environment is most likely a soft landing, not the start of an economic recession.
Interest Rate Cuts: On September 18th short-term interest rates were cut by 50bps (1/2 of 1%) by the Federal Reserve Board (The Fed). To the uninformed observer, this move may not appear to be important. In our opinion, by not taking a more laisse-faire approach with a 25bps rate cut, The Fed was signaling to both businesses and the markets that they are willing to be aggressive with policy to meet its mandate to maximize employment and maintain stable prices, which involves controlling inflation and ensuring the purchasing power of the US dollar over time. And just as important, they stated the rate cut cycle while the economy is growing above the long-term trend of 2.0-2.3%. We believe more softening in the jobs market will see additional 50bps rate cuts, not 25bps at future board meetings.
Can the current stock market bull market continue?
We get this question regularly these days, and for good reason. The stock market ended what we refer to as a cyclical bear market in October 2022 and has, for the most part, moved higher since. Add in the 20%+ move for the S&P 500 through the first 10 months of this year, we don’t find it unreasonable to question the sustainability of such a powerful move higher.
But taking a step back and reflecting on the bigger picture for perspective is important. Major market trends, after all, can continue for long periods. We define “long periods of time” not in days or months but in years and sometimes decades. These long-term trends are referred to as secular bull markets and secular bear markets with some distinct characteristics.
A secular bull market is characterized by a prolonged period of rising asset prices, typically spanning several years to decades. During these phases, investor confidence is generally high with a generally good economic backdrop and corporate earnings growth outpacing inflation. Secular bull markets are underpinned by structural changes in the economy, such as technological advancements, demographic shifts, and favorable government policies that create a conducive environment for growth. Looking back, the period from 1946 to 1966 and 1982 to 2000 are often considered secular bull markets.
Secular bear markets are very much the opposite of their bullish counterpart. These markets typically emerge following a prolonged bull cycle, characterized by economic stagnation, declining corporate profits, and investor pessimism. Various factors, including high inflation rates, rising interest rates, and significant geopolitical tensions can drive secular bear markets.
At Magellan Financial, we believe that we are currently in a secular bull market that began in 2013 when the S&P 500 broke above the previous all-time highs and is likely to continue for the foreseeable future. According to Wells Fargo Investment Institute, corporate earnings are expected to grow more than 10% in 2025, far outpacing moderating inflation. Structural changes around AI and health care are providing the technological breakthroughs, while Federal Government industrial policy is helping to bring manufacturing back to American soil. In addition, the Federal Reserve Bank just cut short-term interest rates and Chairman Powell has indicated two more quarter-point rate cuts before year-end.²
Chart #2: www.stockcharts.com Data 01/01/13 – 09/30/24 as of 10/01/24. 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.
Final Thoughts
We understand how easy it can be for those who don’t watch the markets for a living to miss the big trend. For one, the business media talk about what is happening today and what is moving stock XYZ today and maybe tomorrow. The other reason we believe the average investor can miss the big picture is that major trends do not move in a linear manner. Within a secular bull market, there will be cyclical down periods. In a secular bear market, there will be market rallies.
Currently, there is a lot going right in the economy and corporate board rooms. The trends for growth continue to be favorable. Interest rates have started to trend lower. Technology is moving forward at a rapid pace. The big picture remains intact.
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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