By Akemi Kondo Dalvi, CPA/PFS, CFP
With the blink of an eye, here we are in the fourth quarter, on the verge of another presidential election, and with more of the year behind us than ahead.
A historically rare event is unfolding, in that the Fed might have nailed the soft landing they so delicately calibrated. Rampant inflation of 2022 was curbed without pushing the U.S. economy into an outright recession. No one will say we are out of the woods yet, but the outlook is more positive than negative, as the ominous inverted yield curve steepens towards normalcy.
The third quarter of the year produced positive returns, adding to the gains year-to-date. The Wilshire 5000 Total Market Index, the broadest measure of U.S. stocks, gained 6.2% in the third quarter, boasting 20.6% gains so far this year.iThe widely quoted Standard and Poor’s 500 Index gained 5.5% in Q3, and 20.8% year-to-date.ii
The Russell 2000 Small-Cap Index recorded an 11.2% gain so far this yeariii, and the technology heavy Nasdaq Composite Index gained 20.8% as of the third quarter.iv
Foreign markets have done well, gaining 6.7% in the third quarter or 10.4% for the year, as measured by the EAFE Index of companies in developed foreign economies.vEmerging markets, as measured by the EAFE EM Index, gained 7.8% in Q3 (in dollars) and were up an impressive 22.9% for the year.
Real estate, as measured by the Wilshire U.S. REIT Index, was up 15.2% in this quarter alone, accounting for a gain of 14.9% for the year. The S&P 500 GSCI Index, which measures commodities, posted losses in the second quarter, but broke even by the end of Q3, with sudden gains in recent weeks as geopolitical issues in the Middle East drove investors towards the security of oil.
Gold also tends to do well when investors are concerned about inflation or uncertainty. As such, the price of gold was up 13.7% in Q3 and up 28% for the year, to a record $2,686 an ounce.vi
As noted, the inverted yield curve that often predicates a recession is normalizing. In September, the Federal Open Market Committee (FOMC) cut the interest rate by 50 basis points or 0.50%.viiThis resulted in rate declines across the yield curve. Currently the 10-year Treasury bond is around 3.9%, and the 30-year government bond stands around 4.3%. Five-year municipal bonds are yielding 2.4% currently, and 30-year munis are paying 3.52%, a slight decline from earlier in the year, but higher than the short-term bonds.viii
After the September 2024 rate cut, the Fed Funds Rate currently stands at 4.75-5.00%.ixThe Fed is anticipated to continue rate cuts through the end of 2024 and into 2025, targeting a Federal Funds Rate of 3.4% by the end of 2025. Falling interest rates have historically benefited smaller companies who are more interest rate sensitive or rely on lending to support research and growth.
An Avantis study noted that in examining historical U.S. stock market returns from 1976 through mid-2024, when interest rates have fallen, small-value stocks have outperformed the U.S. total market by 5.8%. They go on to conclude that periods of falling rates have historically been favorable for value investors.x
In 2024, it feels like the stock market records a new market high each week, leading to investor exuberance, and while that is unnerving to financial advisors, there aren’t any definitive storm clouds on the horizon. Although the presidential election is around the corner, history tell us that there is no discernible pattern in the market for gains or losses after a president from either party is elected into office. Rather the market moves for policy changes, and policy changes must be approved by the House and Senate, due to our legislative process.
Therefore, as an investor, it may be more prudent to watch which political party takes control of the House and Senate rather than who wins the presidential seat alone.
Meanwhile, GDP or Gross Domestic Product is running at 3.4% and consumer confidence remains positive, leading to spending that stimulates the economy and supports our currently high domestic stock prices.xi
Geopolitical risk remains the variable we cannot control, nor predict. As the Middle East conflict accelerates, higher oil prices are likely to continue.
One thing we know is that the stock market is resilient. We have been through crises before and the market navigates through volatility, pricing in current conditions as they evolve. There is no good reason to believe that this time is different, although disturbing news headlines are always jarring, regardless. While we do expect volatility in the weeks ahead, the market outlook for now remains cautiously positive.
Please reach out to a Certified Financial Planner or CPA Personal Financial Specialist if you could benefit from a partner in your financial journey ahead.
i. https://www.wilshire.com/solutions/indexes
ii. https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
iii. http://www.ftse.com/products/indices/russell-us
iv. https://www.nasdaq.com/market-activity/indexes
v. https://www.msci.com/real-time-index-data-search
vi. https://www.spglobal.com/spdji/en/index-family/commodities/broad/#overview
vii. https://www.federalreserve.gov/newsevents/pressreleases/monetary20240918a.htm
viii. http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
ix. https://fred.stlouisfed.org/series/FEDFUNDS
x. Data from 1/1/1976 – 8/30/2024. Source: Avantis Investors, Ken French Data Library , FRED.
xi. https://www.bea.gov/news/2024/gross-domestic-product-third-estimate-corporate-profits-revised-estimate-and-gdp-0
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783 [email protected]), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.