“You can’t predict. You can prepare.” – Howard Marks
June was a mixed month for equity investors. Large cap indexes continued their upward assent as the small-cap and mid-cap indexes retreated for the second straight month. International equities – laggards for the past decade – have at least temporarily caught a bid higher, up for the month and holding their own so far in 2024. Bonds, commodities, and the US Dollar were slightly higher for the month.
All data as of 07/01/2024, 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.]
In our experience, Wall Street analyst market predictions are an unreliable source for making investment decisions. Every year the big Wall Street firms come out with thoughts and predictions for the coming year. Here are some examples from the end of 2023:
- Goldman Sachs suggested that the S&P 500 P/E would be roughly unchanged at 18x by the end of 2024.(1)
- Deutsche Bank and BMO Capital Markets set some of the most bullish targets, predicting the S&P 500 to hit 5,100 by the end of 2024.(2)
- Morgan Stanley’s chief equity strategist Michael Wilson predicted the S&P 500 ending at 4,500 next year.(3)
- Goldman Sachs believed that 2024 would be “the year of the bond” while JPMorgan Chase’s Bob Michele and Kelsey Berro predicted that U.S. aggregate bonds could return between 10% and 15% in 2024.(4)
After six months of trading, none of these predictions are correct. And if we are being honest, we believe the task of making predictions of this sort is next to impossible given the large number of factors that influence the stock market and bond market indexes. Yet every year, out come the pundits with these grand predictions.
Instead of the hard slog forecasted by many for the equity markets, 2024 has looked much like 2023. Except for small-cap stocks, 2024 has produced positive equity returns dominated by several of the largest companies in the S&P 500. The move higher did pull back in the second half of April and the end of May, but nothing too concerning or that we feel is out of the ordinary. At the end of June, the S&P 500 was up more than 14% and just off recent all-time highs.
Chart #1: www.stockcharts.com Data 01/02/23 – 06/28/24 as of 07/02/24. 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.
Over in bondland, the expectation of several short-term interest rate cuts by the Federal Reserve Bank (The Fed) never materialized. Without a rate cut so far in 2024, the “year of the bond,” and the 10-15% projected returns have not happened. At the end of June, the Aggregate Bond Index (AGG) is slightly negative for the year.
Commodities are up pretty substantially in the first six months of the year. We must note, however, that when you look a little deeper into commodity prices the first-half gains do not appear to be cause for concern. After a strong move higher in 2021 and the first half of 2022, the CRB Commodities Index (CRB) has consolidated into a 2+ year basing pattern, ending the month of July between the 2022 highs and the 2023 lows.
Chart #2: www.stockcharts.com Data 09/01/20 – 06/30/24 as of 07/02/24. 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.
Overall, 2024 has been a good year for investors.
What’s Ahead for the Markets?
Unlike the pundits, we will not give you a price target for the S&P 500 or the 10-year Treasury bond yield. Instead, we will go back to our Stock Market Outlook for 2023, in which we told investors to think about the next decade, not the next quarter. “When we look back at the world of 2023 in 2033, we think you will be amazed at the changes that have taken place. Just like the changes that happened between 1983, 1993, 2003 and 2013 were substantial. Just like in the past, today’s challenges are what lead to tomorrow’s innovations.”
Our thought at the time, coming off a very poor 2022, was that many investors were pessimistic about the future of the financial markets. This is not unusual or surprising. What was different about 2022, however, was the fact that both the major stock market indexes and the major bond market indexes were negative for the year. The last time that occurred was in 1969.
Yet, we knew there were a lot of good things happening. Bond investors took a hit as interest rates were brought from historically low levels back to what we perceived as a more normal rate. While this did not feel good for investors, the result was cash investments started to pay investors interest again and bond yields returned to more historically normalized levels.
For the equity markets, we know that over time the stock market moves higher as a result of earnings growth for publicly traded companies. In the short term, a company can increase earnings by reducing costs. This tactic can only do so much before investment is necessary.
Our research shows that Corporate America has been investing in the future. In part, this investment is a result of three major initiatives passed to raise the country’s industrial capacity: the 2021 Infrastructure Investment and Jobs Act (IIJA), the 2022 Inflation Reduction Act (IRA), and the 2022 CHIPS and Science Act (CHIPS). These represent the largest U.S. commitment to industrial policy since the Cold War.
As for the private sector, it was reported that the aforementioned laws helped spur over $500 billion in private sector manufacturing investments, including approximately $240 billion in clean energy manufacturing investments. It’s important to note that these figures are cumulative and not just for the year 2023.(5)
Corporate America has also been heavily investing in AI. According to a recent Accenture survey, 63% of organizations are now prioritizing AI over all other digital technologies with more than half of companies investing more than 5% of their digital budgets in AI.(6) According to TechCrunch, AI-related private investment in 2023 totaled $95.99 billion.(7)
Secular change is happening. We believe this is great for future stock market returns. But what about the next six months? It depends.
From the data we have seen, the economy does not appear to be going into a recession but is starting to slow down. We are watching three areas for clues:
The labor market: A barometer for economic health that includes employment levels, wage growth, and workforce participation, the strong labor market has played a key role in driving consumer spending power. While it remains positive, the data has been less robust in recent months. If momentum continues to slow or even turn negative, the implication is spending power will be reduced. In our opinion, this would be a negative for corporate earnings and the stock market.
Credit Markets: We continue to monitor both lending rates and credit spreads. Central banks’ monetary policies influence interest rates, affecting borrowing costs for businesses and consumers. European central banks have started to reduce borrowing rates as The Fed continues to stand firm as the yield curve remains inverted (short-term rates exceeding long-term rates). A reduction in short-term rates by The Fed would be positive in our view. And if credit spreads start to widen (the difference between corporate bond yields and risk-free government bonds), we believe it could cause some short-term pain for investors.
Liquidity: Market liquidity refers to the ease of buying or selling assets without significantly impacting prices. Illiquidity can exacerbate market volatility. Monitoring liquidity conditions in financial markets—such as bid-ask spreads, and trading volumes —is essential. Central bank interventions, quantitative easing, and regulatory changes impact liquidity. Sudden liquidity shortages can trigger market sell-offs, affecting investor sentiment and overall economic stability. We do not see liquidity issues as a risk in the back half of the year.
Final Thoughts
In our view, the big picture remains constructive for the stock market due to secular changes and the current investments in new technologies. Between now and the end of the year we expect the trend higher to continue, but with more volatility than we witnessed in the first half of the year. Volatility could come because of changes in the credit markets or labor trends. Current indications suggest negative effects are possible, not probable.
We also need to note that this is a presidential election year. Market history tells us that stock market volatility tends to increase in the months before the election. Post-election, the stock market has a habit of rallying into the end of the year. We believe heightened volatility later this year is the most likely scenario.
The possibility of heightened volatility is not an indictment of the stock market. We believe market volatility is a feature to be embraced and not a bug to be afraid of. While it is easy to find pundits calling for the markets to collapse, it is important to keep your perspective focused on all the positives that are happening that will continue to drive the innovations that create market growth and prosperity.
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Sources:
1. 2024 US Equity Outlook All You Had To Do Was Stay (goldmansachs.com)
2. What 2024 S&P 500 forecasts really say about the stock market | Morningstar
3. Wall Street revamps 2024 S&P 500 targets after record-setting stock-market rally | Morningstar
4. Is the Bond Market Poised to Skyrocket in 2024? Here’s What Wall Street Thinks. | The Motley Fool
5. FACT SHEET: One Year In, President Biden’s Inflation Reduction Act is Driving Historic Climate Action and Investing in America to Create Good Paying Jobs and Reduce Costs | The White House
6. Corporate AI adoption is on the rise | TechCrunch
7. Investors are growing increasingly weary of AI | TechCrunch
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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 decisions. 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