2024-Q3 Quarterly Keynote
By: Ryan P. Johnson, CFA, CFP® - Managing Director of Investments
The third quarter ended with a new closing high for the S&P 500, which is the fourth quarter in a row the index closed at, or very close to, a new high. The Federal Reserve dominated financial headlines and bond market trading activity in Q3. Stock and bond returns have been strong over the past 3, 6, and 12 months; we expect more modest, but generally positive, returns over the next several quarters. One-year returns have been strong, in part, due to trough comparisons from last October. Back then, stocks had pulled back from summer highs, while bond yields were at multi-year highs. Since then, lower yields led to higher bond prices, while earnings growth and higher valuations drove stock market gains.
Inflation readings continued to improve, unemployment has increased over the past year, and consumer spending and sentiment have been inconsistent. Now that the Fed feels inflation is under control, its focus has shifted to supporting jobs and economic growth. It takes several months, or even quarters, for the effects of interest rate policy changes to show up in economic readings. With a slowing job market in mind, the Fed felt starting this cycle with a 0.50% cut was the best way to demonstrate their desire to not fall behind. Lower rates have been welcomed by borrowers, including home buyers who saw mortgage rates touch the lowest in two years. Savers, going forward, are not welcoming lower rates on cash and bonds. Money market rates may be below 4% by year-end, depending on the magnitude of Fed cuts coming in November and December.
Even though there was another pullback of over 5% in August, stocks notched new highs by the end of September. Recently, the S&P 500 crossed above 5,700 for the first time, and the Dow Jones Industrial Average reached 42,000 for the first time. For both calendar years 2024 and 2025, analysts are expecting more than 5% sales growth and more than 10% earnings growth. A small dividend yield will help total return, but if valuations fall, that will be a headwind.
So far this year, highs and lows for bond yields have been more muted than the range seen in 2023. Still, the third quarter saw a relatively large decline in yields. 5-year Treasuries, for example, started with yields around 4.4%, but fell as low as 3.4%. This was due to moderating inflation and increasing expectations for Fed rate cuts. There has historically been a high correlation between current yields and future bond returns, so today’s corporate rates of around 4.5%, and intermediate Treasury yields of around 3.5%, could be a guide for average fixed income returns over the next few years.
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