2024 Q3 Market Outlook
As we follow along with the dramatic events related to the upcoming presidential election so far, I am sure many are interested in our perspective around the financial and economic impacts of the election. That said, it is also important to focus on the fundamentals and the areas that are truly driving the stock market at the moment. Based on this, our market outlook will cover what has occurred so far in 2024, our perspective on what to watch ahead, and our forecast for the second half of 2024.
A Halftime Report of 2024
Kicking off 2024, we expected a decent year in the market. We expected high single-digit returns with some volatility spread throughout the year. So far, the volatility is the part we have yet to experience. At the halfway point in 2024, the S&P 500, a measure of the broad stock market, was up roughly 15%. International stocks were up in the mid-single digits. Bonds were nearly flat, and commodities were doing well. In the mix of all these different indices, one of the best style indices as far as market returns go, is what is considered to be quality U.S. stocks. For those who have been a client of Mainsail for a while, you know that we have been pounding the table on quality for some time, and this is exactly why and remains a focal point in terms of equity exposure.
The question, of course, is where does that put us as we look ahead? There are three key areas to watch above and beyond Fed policy that may begin to drive volatility as the year progresses. These include valuations, the consumer, and the elections.
Valuations
Through the first month in the second half of 2024, we have started to see markets broaden out. Up until now, we have seen much of the returns from the S&P Index driven by just a handful of stocks which had become extremely overvalued from a historical perspective. Now markets are starting to broaden out, which means that some of the other 495 stocks that make up the S&P 500 are carrying their weight. Even further demonstrating this broadening market, small-cap stocks were up over 10% through the month of July during a period where the S&P 500 was nearly flat.
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Consumer Spending
Consumer spending plays a significant role in our economy and how this translates to market performance. Spending data has been conflicting with some data suggesting strength while banks suggest weakness in the consumer. Although consumer spending does seem strong on the surface, the reality is that the majority of spending we are seeing is coming from consumers in the higher net worth and income categories. Most consumers are having challenges as higher rates and costs of living are affecting their cash flow, and therefore, spending.
2024 Election Impacts
Despite all the recent election news, markets have yet to react. That said, I do not expect the markets to be cool-headed forever. Overall, elections may not lead to as large of an impact as the news stories and headlines may suggest. We do expect volatility as we get closer to fall, but generally, we expect cooler heads will prevail over time. For investment purposes, in terms of market direction and impact, we look to policy, not simply who is in office, to decipher where to explore opportunities and risks ahead. So be prepared as you will likely hear pipe dream tax reform policies that both parties will run on. The question I have is, will these pipe dreams hold true? I might suggest that these larger claims are unlikely to come to fruition as presented, but only time will tell. In the meantime, it is important to focus on facts and be cautious to speculate on what-ifs.
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Looking Ahead Into 2024
We still believe it is important to be allocated to equities, but just as before, it is important to have diversification, especially from stocks with extremely high valuations. As we look ahead, a broad approach to your equity allocation may be prudent. In addition to diversification from the handful of stocks with high valuations, to provide even further diversification, exploring allocations to smaller size companies may allow you to take advantage if markets continue to broaden out.
Additionally, it is a good time to pay close attention to your bond allocation. Although bond exposure is important, patience is the name of the game in the bond market at the moment. Adding more duration to a bond portfolio will help provide appreciation opportunities if rates come down, but in the meantime, shorter term bonds are paying higher interest rates than longer term bonds. So, until we see a path for rates to come down, we would suggest a thoughtful approach in addressing your bond portfolio before making any knee-jerk reactions.