As we say goodbye to 2024, here’s a trip down memory lane to revisit themes that shaped markets over the past 12 months.
A resilient US economy, contained inflation, and an easing Federal Reserve created a positive backdrop for markets.
The S&P 500® Index returned 27.56% year-to-date, marking a sizable annual advance in the broad stock market.1
‘Tis the season for reflecting. Before we hail the new year, lads and lasses, follow me in merry measure while I tell of investor treasure. Or at least the story of a sizeable annual advance in the broad market.1
This month’s article is inspired by those old clip show episodes of our favorite TV sitcoms. You know, the ones developed for the weeks when the writers didn’t have anything new to put out. Following the lead of the sitcom writers who came before me, I present the final Above the Noise of 2024, featuring excerpts from the previous 12 months. But like all good clip shows, there’s a theme that connects these snapshots in time: A resilient US economy, contained inflation, and an easing Federal Reserve creating a positive backdrop for markets.
It appears, at least for now, that the trip down the chimney will be a soft one. Historically, that has meant goodies for you, me, and other investors.
Former Treasury Secretary Lawrence Summers called soft landings “the triumph of hope over experience.”2 I think Summers’ skepticism is reasonable but shouldn’t necessarily inform the base case. A recession (the hard landing) doesn’t appear to be coming, given the lack of cyclical excess in the economy3 and limited leverage on corporate balance sheets.4
Americans are being reasonably steady in paying their credit card bills on time. It’s likely the result of consumer fundamentals remaining reasonably strong. For example, the ratio of household debt service payments to disposable income remains well below the long-term average.5
Fiscal concerns don’t appear to be driving US rates. Historically, there has not been a clear relationship between the yield that investors require to maintain longer-term security and the fiscal status of the US. In fact, the additional real yield required to own longer-term bonds has been remarkably stable over time, suggesting that there is no fiscal credibility problem.6
For all the talk about “sticky” service cost inflation, the transportation services sector is driving half of it.7 It is highly unlikely that this is something that the Federal Reserve will feel the need to suppress.
We are a society that is prone to hyperbole. No sooner than I had grown accustomed to the panic over “hyperinflation” was I told of the forming “economic hurricanes.” Now it’s stagflation? Hyperinflation and economic hurricanes at the same time? Make it stop! I’d argue, with respect to Saturday Night Live’s Linda Richman, that the stagflation is proving to be neither “stag” nor “flation.” Discuss.
The stock market, on average, has historically performed well in the early stages of an easing cycle.8 That is, if the economy is already in a recession before the easing cycle commences or if no recession occurs. Our preferred recession indicators, including corporate bond spreads9 and bank lending standards,10 aren’t flashing recession warning signals.
I’m consistently perplexed by the idea that one party or the other is better for markets. For those keeping score at home, the S&P 500 Index was up 70.2% from the day Donald Trump was elected until the day Joe Biden was elected. Since then, the US equity index is up 76.4%.11 Can we stop this already? I promise to keep fighting this losing battle.
I’m concerned, but not necessarily with regard to the broad markets. Ask yourself this. Has the Russian invasion of Ukraine or the growing conflict in the Middle East meaningfully impacted the direction of the US economy or the expectations for US monetary policy? If your answer is no, as I would suggest they should be, then the conflicts will likely continue to play out in the background with regard to the market. It also doesn’t hurt that the US is currently producing more oil than any nation at any time, rendering the nation less susceptible to overseas shocks.12
Markets have generally performed well following mass sell-offs, as was experienced in early August. The average time to recovery following 5%–10% drawdowns in the S&P 500 Index is three months.13
Good news is good news, and bad news is bad news again. Let me explain. Good economic news, when inflation was elevated, had been viewed as bad news for the stock market as it signaled that policy tightening would continue indefinitely. Now, with inflation contained, the markets have turned their focus away from inflation to growth and have generally rewarded good economic activity.
Valuations are not timing tools. The S&P 500 Index is trading at a premium to its long-term average, but the higher valuations tend to be concentrated in the top names.14 The equal-weight S&P 500 Equal Weight Index is trading at a price-to-earnings ratio of 20.2x, compared to its since inception average of 19.4x.15 I’d hardly call that a bubble.
Thank you for a great 2024. Here’s to you. I raise a glass to everyone.
See you in 2025.
Source: Bloomberg L.P. The S&P 500 Index was up 27.56% year-to-date as of 12/11/24.
Source: Yahoo!Finance, 11/18/2023.
Sources: Bloomberg L.P., Realtor.com, and US Census Bureau, 12/31/23, based on US Housing Inventory: Active Listing Count in the US and US Retail Inventory to Sales ratio.
Source: US Federal Reserve, 9/30/23, based on year-over-year percent change in debt and liabilities on nonfinancial corporate businesses. Latest data available.
Source: Board of Governors of the Federal Reserve System, 7/31/23. Latest data available.
Source: Bloomberg L.P., 2/29/24, based on the components of the US Treasury term premium.
Source: US Bureau of Labor Statistics, 3/31/24.
Sources: Federal Reserve Economic Database (FRED) and Bloomberg L.P., 5/31/24. Based on the average S&P 500 Index performance 12 months before and 12 months after the beginning of the past 16 easing cycles. An investment cannot be made directly into an index. Past performance does not guarantee future returns.
Source: Bloomberg L.P., 6/17/24, based on the option-adjusted spread of the Bloomberg US Corporate Bond Index.
Source: US Federal Reserve, 5/31/24, based on the net percent of bank senior loan officers reporting the tightening or easing of lending standards to medium and large businesses.
Source: Bloomberg L.P., 7/15/24.
Source: International Energy Agency, 8/24.
Source: Bloomberg L.P., 12/31/23, based on the S&P 500 Index drawdowns since 1957.
Source: Bloomberg L.P., based on the price-to-earnings ratios of the top 10 companies in the S&P 500 Index.
Source: Bloomberg L.P., 10/24, based on the price-to-earnings ratio of the S&P 500 Equal Weight Index from 2009 to October 2024.
A growing trend toward fiscal conservatism, the continued importance of monetary policy, increasing geopolitical risks, and technological innovation could drive global markets in the new year.
Deregulation and tax cuts could potentially provide a boost to US economic and market growth, while tariffs and immigration restrictions could pose challenges.
The potential for significant deregulation and tax cuts has excited many investors, leading US stocks to “climb the wall of worry” despite immigration and tariff risks.
Important information
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Image: spyrakot / Adobe Stock
Some references are US-specific and may not apply to Canada.
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Drawdown is the largest cumulative percentage decline in net asset value as measured on a month-end basis.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
A hard landing refers to a sharp economic slowdown after a period of quick growth.
Inflation is the rate at which the general price level for goods and services is increasing.
Inventory-to-sales ratio depicts the relationship between a company’s end-of-month inventory values and monthly sales.
Leverage measures a company’s total debt relative to the company’s book value.
Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.
The price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share.
Real yields are the returns that a bond investor earns from interest payments after accounting for inflation.
The S&P 500® Equal Weight Index is the equally weighted version of the S&P 500® Index.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
Spread represents the difference between two values or asset returns.
Stagflation is an economic condition marked by a combination of slow economic growth and rising prices.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Tightening monetary policy includes actions by a central bank to curb inflation.
The opinions referenced above are those of the author as of Dec. 13, 2024. These comments should not be construed as recommendations but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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