Third Quarter 2024 Review and Outlook
Written by Tim Rigby
The third quarter was a nice one for the stock and bond markets. According to The Wall Street Journal, the popular stock indexes posted returns as follows:
Quarter YearThe Dow Jones Average 8.20% 12.30%
The S&P 500 5.53% 20.80%
The NASDAQ Composite 2.57% 21.20%
The economy continued to grow over the summer with GDP increasing 3% and inflation on the decline. Even though inflation is still modestly above the Federal Reserve target of 2%, the Fed seems very confident that it will moderate further to its target rate in the near term. They actually cut short term interest rates by ½% to help stimulate the economy.
At the same time, strategists are forecasting an improvement in earnings for most companies in the year ahead. This means there is a high likelihood that the stock market rally will broaden out and include many more companies. As we have mentioned in past letters, the last year or two has been dominated by “Big Tech” stocks which are heavily weighted in the above indexes. They have done exceptionally well while many other companies have languished behind. These other stocks are underpriced so if their earnings do start to expand, that should lead to a strong rally in their stocks.
Historically, when the Federal Reserve begins to lower short term interest rates, the economy usually strengthens and enjoys a period of growth. Lower rates help people get loans at better rates in many different sectors such as homes, autos, commercial real estate, and even credit card debt! The stock market tends to perform well and historically the bond market should as well.
The last 10 years have been anything but normal for the bond market. Rates were at 0% most of that time until inflation exploded a few years ago. This led to an “inverted yield curve” which can temper inflation but quite often leads to a recession. It appears that the Federal Reserve has been successful in bringing down inflation without crushing our economic growth, so interest rates should revert to a “normal yield curve”. This means long term rates will be higher than short rates, but this may take a while to unwind. It has big implications for bond investing. While short rates (money market funds) are falling, longer term rates like the 10-year Treasury bond are going up. If you have cash on hand, it may be best to stay invested in Money Market Funds for now until the curve is steeper.
The election is right around the corner and the two sides in the Presidential race have vastly different views on the economic front. We are closely monitoring the different policies being discussed and the likelihood that one could impact the economy or the investing world. Congress controls the purse strings so hopefully no drastic changes occur concerning tax policy and spending and deficits, but again, we will closely monitor.
The world is a dangerous place with wars in Ukraine, the Middle East, and China threatening Taiwan. Our hope is these hot spots resolve soon and don’t escalate. Geopolitical events are unpredictable and can cause short term havoc in our markets, but investing should be done methodically for the long term. Our markets generally react to our financial policies and these danger zones usually fade in importance over time. Our economic news is strong and improving and with the Federal Reserve easing policy, it should be a good time to be invested in our stock market.
Stay in touch and please call us if you have any questions or concerns.
Tim Rigby