Jan 1, 2025
Dec 2024 Market Commentary
No Santa Claus Rally materialized in December, as the Fed announced the likelihood that only two rate cuts would materialize in 2025, and the outlook became more sober. Stocks also struggled as valuations remain elevated. The Dow Jones Industrials had its longest losing streak since 1974, falling for eleven consecutive trading sessions by mid-month. Other major US and International Stock Indices fell by about three percentage points for the month, though 2024 witnessed strong gains, more than 20% for a second year in a row.
Sentiment in the bond market was even more negative, falling from near break-even territory in November to end the year down by -2.3%. Global fixed income declined even more precipitously in December, from a YTD gain of 5.0% in November plummeting to 0.2% at year’s end. Nonetheless, international fixed income outperformed US Bonds for the year, remaining ever so slightly in positive territory for 2024. Since mid-September the yield on the US 10 Year Treasury has increased from 3.62% to 4.58%, near last Spring’s peak of 4.71%, putting an end to hopes for lower borrowing costs, lower mortgages, and other outcomes that would strengthen the economy.
Stock gains for 2024 were highly concentrated among just a handful of stocks known as the “Magnificent Seven”, including Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla, as investors envisioned massive future rewards for AI Technology. As the year ended this enthusiasm may have run its course, at least in the short-term. Returns for the broader market were generally anemic or even negative. Casual investors seem not to recognize the concentrated risks, with just a handful of stocks making up nearly one-third of the S&P500 Market Capitalization.
The year to come remains difficult to forecast, as geopolitical developments take center stage with a new, and often unpredictable administration taking over, while the war in Ukraine may drag on and China maneuvers for political advantage in Asia and around the World. Meanwhile, the potential for sustained inflation, limited rate declines, and potentially larger US Deficits anticipated by Bond Market pundits leads to elevated bond yields and a slower economy. In general, the outlook is more cautious moving forward.
Nov 30, 2024
Nov 2024 Market Commentary
Markets will now move based on the unpredictable decision-making of President-Elect Trump. Expect this rule to apply for the next four years.
Following the Election results markets have advanced, based on expectations of lower taxes and regulations. Paradoxically, markets have also advanced based on the consensus that Trump will NOT implement tariffs and promised changes in the taxation of social security, tips, and other steps which could cause the deficit to explode over the next decade. Such an outcome would be poor for the financial markets as inflation could be expected to soar, along with a period of elevated interest rates.
To date, markets are assuming the best-case scenario. For the month the S&P500 advanced significantly to a YTD gain of 26.5%. At the same time, the bond market has turned more cautious. Following the Election, yields on the US 10 Year Treasury quickly jumped by nearly 20 basis points, peaking at 4.47% on November 13. Since then, yields have backed off to 4.18%, 10 basis points below their level just before the Election. For now, bond markets have concluded that significant tariffs and tax cuts of all sorts will not occur. Still, market observers have tempered their expectations of rate cuts in 2025 from an expected four quarter point cuts (before the Election) to a new prediction of just two quarter-point cuts.
For the moment, sentiment is good, and a Santa Claus Rally is likely as we close out the year. As we move into 2025, with the market reacting to every 2AM Social Media Post by the President, fears over potential inflation, and elevated valuations, things may become more volatile in the New Year. The next four years may be bumpier than many currently predict.
Nov 1, 2024
Oct 2024 Market Commentary
Stocks retreated slightly in October, as the market observed continued strength in the economy with the expectation that the Fed would cut rates more slowly than anticipated earlier in the year. The YTD gain for the S&P 500 slid from 20.8% a month before to 19.6% as October came to an end. The news had a larger impact on fixed income markets, where the US 10 Year Treasury saw yields increase significantly from 3.79% in September to 4.29% on October 31. The unexpected runup in bond yields drove a corresponding decline in the US Aggregate Bond Market from a YTD gain of 2.0% in September back into negative territory once again with a YTD loss of -0.8% by October 31.
As November began, today’s weak jobs report, with 12,000 new jobs created in October, resulted in stocks advancing by more than a percentage point in early trading before closing the day with a gain of 0.4% for the S&P 500. Traders concluded that the Fed would have more breathing space to cut rates in the coming year. Of course, this one-month indicator was likely skewed by two major hurricanes and a strike at Boeing, resulting in a weaker jobs market. Consequently, traders may have read too much into a single month’s report. Bond yields continued to climb, with a 10-basis point increase on November 1 to 4.39% for the US 10 Year Treasury.
The focus in October was on the Economy and the Fed. Looking to November we should expect potentially volatile markets given an almost certain likelihood of a contested Election, should the results next week indicate a Harris Victory.
Oct 3, 2024
Sept 2024 Market Commentary
Both the stock and fixed income markets continued to advance in September, following the adage, “buy the rumor, sell the news.” More specifically, markets anticipated the first rate cut by the US Federal Reserve, and advanced prior to the Fed’s September 18 announcement of a half point cut in the Fed Funds Rate. As the month ended, further advances slowed, and as we move into October the markets are off slightly.
In the bond market the story was similar. From the end of August, the yield on the US 10 Year Treasury fell from 3.91% to 3.62% by September 16 (bond prices moved inversely with yields). From there, yields crept back up to 3.79% by month’s end. Most investors do not quite comprehend how the US Federal Reserve only exhibits direct control over short-term rates (the overnight Fed Funds rate), while longer-term rates are controlled by market forces and future expectations. So, while short-term rates did fall, progress in longer-term rates (which impact things like mortgage and car loan rates) moved in advance of the Fed’s announcement, but crept back up afterwards. Hence “buy the rumor, sell the news.”
Looking forward stocks are likely to hold steady or even advance somewhat, while bonds may eventually see continued declines in rates. At least for short-term rates, where expectations are that the Fed will cut at least twice more in 2024 by a quarter point each time, with four more quarter point cuts in 2025. To the extent that these expectations play out in the coming year stocks may continue to advance, albeit at a slower pace given current valuations, and bond yields in the mid-to-longer end of the yield curve may continue to decline. That said irrational exuberance is unlikely to unfold, and turmoil over Election Results or a widespread conflict in the Middle East, Ukraine, or Taiwan could lead to declines.
Sept 2, 2024
Aug 2024 Market Commentary
Stocks continued to drift upward through the month, with clear indications that the Federal Reserve will begin to cut interest rates at its meeting in September. The economy continues to exhibit falling inflation, continued growth, and generally positive expectations for earnings in the coming year. Consumer sentiment is improving. The S&P 500 moved up a bit more than two percentage points from 5,522 to 5,648. Meanwhile, the yield on the 10 Year US Treasury declined from 4.035% to 3.911% as the month ended. For the first time since early February, yields appear to be holding below 4%, which should give a boost to sectors such as housing.
Although all indications are that the markets should remain healthy into 2025, it is worth noting that September is historically a poor month for the markets. Additionally, investors have done very well in 2024, with the S&P 500 up by 18.4% for the year. Nearly three times the gain (in real terms) observed over the long-term. With this background in mind, and the uncertain outcome of the coming Election, the near-term may bring short-term volatility, as investors take profits and possibly move to the sidelines until the Election passes.
Aug 4, 2024
July 2024 Market Commentary
After continuing to advance in the first half of the month, stocks reversed course in the second half of July, with losses accelerating as we entered August. Sentiment towards AI became more realistic, and concerns about a slowing economy began to take hold, especially with a weak jobs report on Friday, August 2. Stocks ended July a fraction of a point ahead of where they began the month, but losses of about 2% occurred on Friday, August 2.
While the more realistic outlook for tech stocks and AI hit the large cap indices, small-and-mid-caps had healthy gains, as did dividend paying and international stocks. As August began these stocks also reversed course.
Bonds advanced throughout the month, with falling yields as the outlook on the economy softened, and the prospects of rate cuts by the Federal Reserve became more likely. The yield on the 10-year US Treasury fell from 4.4% as July began to end the month at 4.03%. Yields tumbled even more dramatically on Friday, August 2 with the weak jobs report, closing the day with a yield of just 3.79%.
As predicted last month, the major gains of the past year-and-a-half seem to have run their course. Consumer spending, which relied on significant funds generated by fiscal stimulus programs during the pandemic, seem to be running out. Some observers opine that the Fed has left rates too high for too long. While helping to slow inflation, the chance of a slowing economy and even a recession, has put fear into many investors. On a positive note, lower yields should result in lower mortgage rates and other borrowing costs, helping to keep the economy on an even keel.
Peter Gaylord, CFA
Gaylord Wealth Management, LLC
Rocklin, CA