October 19, 2024 Market Update

The better-than-expected retail sales numbers and a solid jobs report released recently powered the stock markets allowing the S&P 500 Index and the Dow to set new record highs this past week.  While all major U.S. equity indexes posted gains, the most notable was the Russell 2000 Index, a proxy for small cap stocks, which saw renewed investor interest closing the week with almost a 2% gain.

The bond market remained largely unchanged for the week but saw plenty of activity as the 10-year treasury yields re-adjusted to reflect the new economic data and its implications on the future Fed rate cuts.  The bond market, as measured by the Vanguard Total Bond Market ETF (BND) was up slightly posting a modest 3 bps gain for the week.

Last Saturday marked the two-year anniversary of the current bull market, which began on October 12, 2022.  Since then, the S&P 500 has risen 62%, while the Nasdaq 100 has surged 88%.  The bullish trend has been driven in large measure by strong corporate earnings, the surprising resilience of the U.S. economy, and the Federal Reserve's efforts to maintain stability and stimulate growth.

Global stocks have also participated in the rally, buoyed by central bank interest rate cuts and China's fiscal and monetary stimulus.  The MSCI EAFE Index, which tracks developed markets outside North America, has managed to keep pace with the S&P 500 since the start of the current bull market.

 So, how long will the good times last?  History suggests the equity markets may have more room to run.  According to Barron’s, the median bull market length is five years, based on data going back to 1949.  Moreover, every bull market since 1970, with the exception of the short-lived 2020 post-Covid rally, has lasted at least five years.

 Even so, it’s quite possible that this time will be different:

•  Industrial production has faltered recently, and personal income growth has struggled to keep pace with inflation.
•  If the Federal Reserve lowers interest rates too quickly, it could reignite inflation, further eroding consumer purchasing power.
•  Geopolitical tensions - such as conflicts, trade wars, or disruptions in key regions—could trigger market instability.
•  A Bank of America survey suggests that investor sentiment is so bullish that a market reversal may be looming.  When optimism is high, stocks tend to be overvalued, leaving less buying power to sustain further gains.
•  On the other hand, the VIX - Wall Street’s “fear gauge” - has been hovering around twenty.  While not extremely high, this reading points to cautious sentiment and ongoing investor concerns about market conditions.

 Pinpointing when a market trend will end is difficult at best.  While recent data and history suggest further gains lie ahead, inflationary pressures and geopolitical uncertainties cannot be ignored.  Accordingly, it’s important to be prepared for both possibilities. 

 That’s all for now.  Have a great weekend and invest wisely my friends.