Fall 2024 Market Commentary

By Marc Usem and the Affiance Financial Investment Committee

The Goldilocks Economy
The third quarter of 2024 delivered another positive return with the S&P 500 gaining 5.4% and bringing year-to-date gains to a stunning 20.7%. The focus of the quarter was surprising central bank activity, which started just after the July stock market highs. In early August, the Bank of Japan raised the target rate on Japanese bonds and reduced its bond purchases to try to support the yen. The result was a rapid unwinding of the yen carry trade, which likely helped push U.S. stocks lower by -8.5% before stabilizing and resuming their upward trend. 

The latest jump in stock prices was a result of the U.S. Federal Reserve’s surprise 50 basis point rate cut in mid-September. The bold move by the Fed was the first rate cut in four years and signaled that they believe the price of money is too high and may lead to future economic weakness. Bonds rallied as rates fell and are now up nearly 5% for the year after spending the first half of the year in negative territory. Further global market support was provided at the end of September by China’s central bank, which introduced a broad fiscal stimulus plan that drove emerging markets higher by nearly 9.5% for the quarter.

The U.S. economy remains on solid footing with second quarter U.S. GDP growth of 3% following a first quarter increase of 1.4% and estimates of 3.1% for the third quarter. While expectations are for the economy to slow somewhat to 1.9% in 2025, the solid economy allows the Fed to focus on their goals for inflation and unemployment. We estimate that the Fed’s inflation goal of 2% has been largely accomplished with inflation as measured by Personal Consumption Expenditures (PCE) at 2.2% in August and the Consumer Price Index at 2.5%. Unemployment, which has trended modestly higher from 3.4 in January of 2023 to 4.2% in July of 2024, is likely the reason the Fed pivoted to a larger 50 basis point cut. 

Keeping the economy growing with low inflation and full employment is like riding a unicycle while juggling flaming bowling pins – very difficult to say the least. Although the Fed has been the brunt of continuous criticism, they appear to have navigated uniquely difficult post-pandemic conditions to lead the economy to a soft landing. With rate cuts supporting stable growth and unemployment, we appear to be in a Goldilocks economy – not too hot and not too cold – it’s just right. 

A strong macroeconomic backdrop allows corporate America to focus on earnings growth, especially given the expectation for interest rates is now lower. Earnings estimates for 2025 are about 10% higher than 2024. Assuming no price earnings ratio (P/E) change, we estimate markets may gain 10% during the next year. However, with lower interest rates reducing the cost of capital, P/E ratios could expand providing gains in excess of 10%. We would note, however, that at 27 the S&P 500 P/E ratio is already on the higher end of recent history, albeit far below the highs of the dot.com bubble. We estimate that volatility may increase as the Presidential election grows near and the economic debate increases. Historically, markets dislike uncertainty and rally on certainty, meaning stocks tend to do well after elections regardless of the outcome. 

As always, we recommend remaining focused on your financial plan and not the ups and downs of markets. We remain focused on our disciplined investment processes to provide well-designed, tax-efficient, globally diversified portfolios that suit our clients’ investment planning needs.

Thank you for your continued confidence in our work. 

Sources: Foreign Policy Magazine, CNBC, Reuters, Atlanta Fed, Trading Economics, U.S. Bureau of Economic Analysis, Staffing Industry Analysts, U.S. Bureau of Labor Statistics, Yardeni Research, Macrotrends, CNN

The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.