This Week's "Noise"
The rate cutting cycle has started. The Federal Reserve lowered the Fed Funds rate by 0.50% last week. Markets expect another 0.50% to 1.00% by year-end. Stocks continue to hit new highs as a soft landing for the US economy seems highly likely. The upcoming US elections will dominate the news for the next six weeks.
Last week we commented that markets seem unconcerned about rising Middle East tensions. That changed today. Israel is invading Lebanon and Iran is threating to bomb Israel. If the war widens, stock markets will be under pressure.
Current Market Outlook (6 to 12 months)
Market
A key theme we have mentioned several times in person and on our Thursday calls is how these concentrations from the largest companies will inevitably violate SEC, FINRA, and IRS guidelines. The S&P and Russell investment index providers have both proposed changes to the methodologies in index calculation to align with the Investment Company Act of 1940 and the Federal Internal Revenue Code. In September we saw outperformance from the non-Mag Seven part of the market (CNBC).
Economic
The yield curve (a chart of U.S. treasuries by length and current yield) returned to normal (un-inverted) recently for the first time since July of 2022 (the 2-year & 10-year rates). The inverted yield curve (lasting for just over 2yrs) indicated lower expected future growth rates; thus, shorter-term bonds unintuitively have higher annual rates than longer-duration bonds. Eventually, we expect to move to a more normal yield curve environment where short-term bonds have lower annual rates, and the curve becomes “steep” as longer maturity bonds have higher yields. These shifts are important indicators of future growth expectations. As of this week, we expect 200bps or 2.00% Fed Funds rate cuts over the next 18 months. As previously stated, a soft landing is underway. We don’t expect the Fed to return to near 0% after that 18-month stretch. If that is the case, the economic picture is much worse than anyone expects.
Long-Term View (4 to 7 years)
Long term we believe the US economy will continue to outperform other world economies. This is supported by a combination of re-shoring manufacturing, new investments resulting from the Inflation Reduction Act, US energy independence, and higher productivity due to the implementation of Artificial Intelligence (AI) software/systems.
We believe the US stock market should be 40% to 60% higher by the end of 2028. A S&P 500 index of 7,000 to 8,000 appears possible.
Bonds have re-emerged as an important part of asset allocation as yields have risen. We expect a diversified bond portfolio to produce returns 3% to 5% above inflation for the next 5 to 7 years.
We currently estimate that the net worth of American households rose by $2.8 trillion in the third quarter to a record $157.2 trillion, or roughly $446,000 per head. Total net worth is up 11% over the past year and 47%, (or a staggering $50.1 trillion), over the past five years, easily outpacing an estimated 23% increase in consumer prices and a 35% increase in personal income over the same period.
This wealth surge has come from both stocks and housing (Dr. David Kelly, JPMorgan Asset Management September 30, 2024).
“Things that have never happened before happen all the time.”
- Morgan Housel, The Psychology of Money
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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Any opinions are those of John O’Hare II and not necessarily those of Steward Partners. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
Asset Allocation and diversification do not assure a profit or protect against loss in declining financial markets.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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