CWS Market Review – October 1, 2024

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The Best Year for Stocks Since 1997

The stock market closed yesterday at another all-time high, 5,762.48. These new highs are getting repetitive! So much for September being the worst month of the year.

Through September, the S&P 500 is up 20.8% on the year. That’s better than every single major investment firm expected.

Yesterday was the index’s 43rd new high this year. This is the best first nine months to a year in 27 years. Also, this is the best start to a presidential election year on record (going back to 1928).

For the month, the S&P 500 gained just over 2%, and for the third quarter, the index gained 5.5%. This was the fourth quarterly gain in a row for the market.

What’s remarkable is how placid the stock market has been. Despite a flurry of scary headlines, the market keeps quietly chugging along. Except for a quick three-day panic in August, this market has been remarkably calm.

This has also been a tale of two markets. For the first half of the year, growth stocks strongly led value, but in the middle of the year, value started to take the lead.

In recent weeks, value’s surge against growth has started to wane, but I’m not ready to say the value cycle is over. As long as the Fed is committed to lowering interest rates, that’s good news for higher-yielding sectors of the market.

In particular, the areas of the market that are set to do well are defensive areas. By that, I mean staples, healthcare, utilities and REITs. There’s even been talk of “AI fatigue” plaguing some large-cap tech stocks. I wouldn’t be surprised to see more of that.

What’s been driving the recent rally? Obviously, the Fed rate cuts are playing a big role. Not only that, but it looks like more rate cuts are on the way. On Friday, we got good inflation news when the government said that the Personal Consumption Expenditures (PCE) price index rose by just 0.1% in August. That was less than expected.

Over the past 12 months, the PCE price index is up by 2.2% (see below). That’s the lowest 12-month rate since February 2021. I don’t want to say that inflation has been defeated, but the price outlook is getting better.

The PCE is important because it’s the Fed’s preferred measure of inflation. Unlike the CPI, the PCE is based on what consumers actually buy.

The core PCE, which excludes food and energy prices, also rose by 0.1% in August, and that was also below expectations. Over the last 12 months, the core PCE is running at 2.7%. That’s still above the Fed’s 2% target for inflation, but the trend is moving in the right direction.

The progress in August came despite continued pressure from housing-related costs, which increased 0.5% on the month for the largest move since January. Services prices overall rose 0.2% while goods declined by 0.2%.

We also learned that personal income rose by 0.2% in August, and spending rose by 0.2% as well. Both numbers were below expectations.

Since today is the first business day of the month, we got the ISM Manufacturing Index. For September, the ISM was 47.2. That’s the same as it was for August. That’s a weak number but nothing terrible. Wall Street had been expecting 47.5.

Tuesday’s report on job openings showed that there are eight million jobs looking to be filled. That’s an increase of 329,000 since July. The next test for the market will come on Friday with the September jobs report. Wall Street expects to see a gain of 150,000 net new jobs.

The Federal Reserve meets on November 6-7, and it’s very likely that the Fed will cut rates again. In fact, yesterday, Jerome Powell spoke at a conference in Nashville, and he said the Fed will keep lowering interest rates to help keep the economy going.

In the most recent projections, Fed members see the central bank cutting by 0.5% before the end of the year. Again, the rate cuts aren’t so much about the Fed helping a weak economy. Truthfully, the economy isn’t weak right now. Instead, it’s better seen as the Fed taking back its extraordinary rate hikes that were used to combat inflation. With inflation receded, so can interest rates recede. At least, that’s how the Fed sees it.

I am concerned about the dockworkers’ strike, especially if it drags on. That could cause disruptions and mess up supply lines. A strike is probably not strong enough to push the whole economy off the lines, but it will have an impact. We can’t say how great it will be right now.

Why Prices Are Better Than Reports

If you follow the government’s economic data long enough, you learn to greet each new report with a bit of skepticism. That’s because nearly every report will, at some point, be revised—and those revisions will, themselves, be revised. And those revisions will be revised yet again. In the realm of economic data, few things are as surprising as the past.

Just recently, the Labor Department conceded that it overcounted the number of jobs in the economy by 818,000. Well, that’s a sizable miss.

It doesn’t end there. Last week, the government said that it under-reported how well the economy recovered from Covid. Originally, the government said the economy grew in real terms by 5.1% from Q2 of 2020 through the end of last year. Now it says the economy grew by 5.5% over that time span. That small-sounding mistake is really a few hundred billion dollars.

The government originally reported negative growth for the first and second quarters of 2022. Some claimed that since it was two quarters of negative growth, that should count as a recession.

While two quarters of negative growth is a good shorthand for a recession, it’s not precisely correct. The official definition of a recession is much broader. In any event, it’s now a moot point since, thanks to the revisions, the government now says the economy grew slightly during Q2 of 2022. Change a few numbers and presto, no more recession.

The Bureau of Economic Analysis (BEA) also revised higher the U.S. savings rate. Previously, the BEA said the savings rate had dropped to 2.9%. That’s really low. Now they said it only got to 4.8%. Goldman Sachs said that number is probably still too low.

This is another reason why I trust prices more than the government reports. Sure, the market can be wrong. It’s wrong all the time. But at least the stock market never revises its old prices.

The Decade Cycle

We’re nearing the midpoint of the decade, and I was curious to see how the stock market performs, on average, each decade. I took all the data for the S&P 500 since 1957. That’s when the index expanded to 500 stocks.

Footnote: I started each decade on January 1 of each year ending in zero.

I found that the stock market performs much better during the latter half of the decade than it has in the first. In fact, during the first three years of each decade, the market has basically gone nowhere.

Even in this decade, the S&P 500 was sitting on an 11% gain for the decade as late as mid-October 2022. That’s a modest gain for nearly three years.

But that back half of each decade is a very different story. In five years, the stock market has gained, on average, more than 120%. Interestingly, the 1987 Crash is still clearly visible on this chart.

I’m not sure what could explain the difference. Maybe it’s a natural cycle? Or it’s a random draw? The Soviet economist Nikolai Kondratiev said there are 45- to 60-year cycles at play in the economy. Beats me. But I wouldn’t mind seeing the market double over the next 5¼ years.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on October 1st, 2024 at 6:22 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.