This Week's "Noise"
The rate cutting cycle has started but might stall due to strong employment gains and good earnings reports. Markets expect another 0.50% to 1.00% by year end and we believe that is too aggressive. Stocks continue to hit new highs as a soft landing (or no landing?) for the US economy seems highly likely. The upcoming US elections will dominate the news for the next six weeks.
Israel is expected to retaliate against Iran soon. If the war widens, stock markets will be under pressure.
Current Market Outlook (6 to 12 months)
Market
The stock market has had a very good run and is getting expensive. We would expect a pullback of 5 to 7% before year end. Long term we remain bullish.
A key theme we have mentioned several times in person and on our Thursday, call’s 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. Since September we have seen the rest of the non-Mag Seven stocks catching up in performance (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 economic growth rates and lower inflation; 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. While shorter term rates (0 to 4 years) should move lower with the Federal Reserve easing, we do not see longer rates coming down.
We are still expecting a soft landing. This year, we expect the trendline growth rate to be close to 2.5% GDP growth, and consensus estimates expect next year's growth rate to be closer to 1.8% year over year. (FactSet) Recessions are typically caused by Black Swan events (ex; the COVID-19 pandemic), hawkish Federal Reserve policy (rapidly rising Fed funds rates), and a commodity spike(particularly in energy/oil) or extreme valuation unwinding.
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.
Due to the strong 2024 returns (+24% for the S&P 500), we are adjusting our longer-term outlook for the US stock market accordingly (FactSet). We believe the S&P 500 index should be 7,000 to 8,000 by the end of 2028. This represents an approximately 20% to 40% return from the current level.
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.
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