Key takeaways
Despite brief setbacks in April, August and September, bull market momentum continues for stocks.
The S&P 500 is up more than 21% through late September.
Bonds are also generating positive year-to-date total returns.
While market volatility has recently spiked, the bull market rolls on for U.S. stocks. So far this year, April was the only down month for the S&P 500. Stocks declined in early August and early September, but in both instances quickly bounced back, with the S&P 500 and Dow Jones Industrial Average repeatedly topping new record highs.
Growing concerns about the current economic expansion's staying power appeared to fuel market volatility beginning in late July. Stock prices continue to fluctuate, but investors remain bullish, and markets continue to rally.
Year-to-date through September 24, 2024, the S&P 500 is up more than 21%. 1 This comes on the heels of 2023’s 26%+ gain. Large-cap U.S. stocks, represented by the S&P 500, continue to outpace other global equity markets. Mid-cap, small-cap and international stocks continue to lag the S&P 500, as they did in 2023.
Federal Reserve (Fed) monetary policy is a key bond market driver. After much investor anticipation dating back to early 2024, the Fed in September finally initiated its first rate cut for the current cycle, reducing the federal funds target rate by 0.50%. Markets already began pricing in the Fed’s rate cut prior to its September meeting, as bond yields declined across the board. Throughout the year, investors anticipated that the Fed would begin cutting interest rates. Fed Chair Jerome Powell indicated in recent comments that the Fed is not only focused on tempering inflation, but on maintaining a strong labor market. 2 With the unemployment rate creeping higher (4.2% in August), 3 concerns of an economic slowdown grew. This factor likely contributed to the declining bond yield trend. In August, bond yields dropped below 4% for the first time since early 2024. Because bond prices rise when interest rates fall, bonds, on a total return basis, are now in positive territory for the year. 4
In the fixed income market, Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management says Fed rate cuts have a limited immediate impact on longer-term bond yields. “For 10-year Treasuries and other longer-term debt, factors like future inflation and economic growth expectations will be more important than Fed rate cuts,” says Haworth. “Fixed income investors may want to consider other options beyond traditional Treasury and investment-grade corporate bonds.”
The underlying economic environment demonstrates continued strength, with Gross Domestic Product (GDP), the key measure of economic growth, expanding at an annualized 3.0% rate in 2024’s second quarter. That more than doubled the first quarter’s annualized growth rate of 1.4%, and even exceeded 2023’s 2.5% growth rate. 5 “As we look forward from here, most of the data points to a still-expanding economy,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Third quarter signs are generally positive as well, including retail sales data showing that the consumer remains resilient,” says Haworth.
“The economy’s held up reasonably well to this point because of the strong labor market, and consumers’ fairly strong financial position,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “Corporate profits are still intact, and corporate spending remains robust.”
“The economy’s held up reasonably well to this point because of the strong labor market, and consumers' fairly strong financial position,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “Corporate profits are still intact, and corporate spending remains robust.” Freedman says there’s an expectation that economic growth will slow, but so far that isn’t catching the markets off guard.
For all of 2023 and through 2024’s first half, the technology sector drove stock market performance. In August and September, leadership broadened out to other sectors. Leading up to the Fed’s September rate cuts, interest-rate sensitive stocks such as those in the real estate and utilities sectors were among the market’s top performers.
“The market is leaning toward the likelihood that the economy will achieve a ‘soft landing’ (avoiding a recession), but acknowledges that risks still exist,” says Bill Merz, head of capital markets research, U.S. Bank Wealth Management. On the plus side, he notes “the market doesn’t like uncertainty, and the Fed’s rate cut removes some uncertainty from the market.”
Haworth says given the degree of volatility in the market, some may want to consider dollar-cost averaging as a way to effectively invest in equities. “By making regular investments over a period of time, you aren’t anchored to an investment at a single price; you stretch your investment out at different price points over time,” says Haworth. “It also gets you going on an investment plan so you can start growing your wealth now.”
Assets set aside to meet funding needs in the next 18 months should capitalize on today’s elevated interest rate environment by utilizing higher-yielding savings accounts, CDs and money market mutual funds. However, Haworth notes that short-term savings yields will decline as the Fed cuts interest rates.
“Be prepared to take what the capital markets offer given the current environment’s realities,” says Freedman. He advises that long-term investors should consider positioning their portfolios with a neutral mix of equities, fixed income and real assets. Freedman adds, “It’s critical to have a financial plan that’s tied to the specific goals you hope to achieve.” With a plan in place, you can more readily identify investment strategies that align with your goals.
Based on your goals, timeline and risk appetite, consider these additional portfolio strategies:
Discuss options with your wealth management professional and be sure to understand the risks associated with each of these investments. Determine whether any can help you more effectively diversify your portfolio.
Freedman adds it’s important to regularly review your plan with your wealth management professional. Determine whether there are opportunities to rebalance your portfolio in ways that more appropriately reflect your investment objectives, time horizon, risk appetite and the current market environment.
Have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.
Note: Tax-loss harvesting does not apply to tax-advantaged accounts such as traditional, Roth and SEP IRAs, 401(k) and 529 plans. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies. Structured products are subject to market risk and/or principal loss if sold prior to maturity or if the issuer defaults on the security. Investors should request and review copies of Structured Products Pricing Supplements and Prospectuses prior to approving or directing an investment in these securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Employing leverage may result in increased volatility. These investments are designed for investors who understand and are willing to accept these risks. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. In exchange for higher potential yields, investors assume the risk of a disaster during the life of their bonds, with their principal used to cover damage caused if the catastrophe is severe enough. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Diversification and asset allocation do not guarantee returns or protect against losses. Past performance is no guarantee of future results.
In the current environment, investors might consider a neutral allocation to equities, fixed income and real assets. Equities have been subject to increasing volatility in recent months. At the same time, fixed income investments may benefit from declining interest rates. As always, consult with your wealth management professional to determine the most effective investment strategy aligned with your own goals and risk tolerance.
Domestic large-cap equities have been the capital markets stand out performers in 2024. The market’s performance in 2024’s first half was driven by technology-oriented stocks benefiting from investor enthusiasm about developments related to artificial intelligence. In the third quarter, with bond yields declining and the market convinced that Federal Reserve interest rate cuts would soon begin, other sectors such as real estate and utilities began to lead market performance. While equity market valuations may appear somewhat elevated given the market’s recent strong returns, analysts remain optimistic about 2025 corporate earnings growth, which could fuel a further stock market upside. However, you may consider dollar-cost averaging to potentially offset some of the risk of market volatility.
In the short term, markets are unpredictable, and can experience short-term up-and-down movements. Investors need to position assets designed to meet long-term goals with a willingness to withstand some short-term market movements. In today’s market, stocks have enjoyed a solid 2024, but not without volatile periods. Bonds lost ground in the first half of the year as interest rates moved higher compared to where they stood at the end of 2023 but are now in positive territory for the year. Be sure to consult with your financial professional to assess your own risk tolerance level and position your long-term assets accordingly.
The Federal Reserve is set to ease monetary policy aimed at slowing consumer demand by cutting interest rates this month. Does this mean the threat of recession has receded?
Declining – yet persistently elevated – prices continue to weigh on consumers and policymakers alike.
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