Market Momentum: Your Weekly Financial Forecast & Market Prep
Issue 18 / What to expect Oct 21, 2024 thru Oct 25, 2024
Last Week: Insights & Trends
The U.S. stock market has had a stellar run with significant gains that have left many investors optimistic. Since early August 2024, the market has rallied more than 12%, pushing its year-to-date return to nearly 23%. This two-year performance, if sustained, could mark the second consecutive year in which the S&P 500 has delivered a return exceeding 20%. Such a feat would be remarkable, as back-to-back annual gains of this magnitude are somewhat rare, and achieving them depends on a combination of favorable economic conditions, corporate profitability, and interest-rate policies.
Historically, strong consecutive years in the stock market are not without precedent, but they are uncommon. Since 1950, there have been five instances where the market followed a 20%-plus gain with another 20% gain the next year. These periods often aligned with significant economic growth and favorable market environments. For example, the 1950s saw gains of 32% and 24% in 1950-51 and then an extraordinary 53% and 32% in 1954-55. Similarly, in the mid-1970s, 1980s, and the tech-boom years of the late 1990s, the stock market experienced similar patterns. However, these were exceptional circumstances, and in many cases, the market did not extend the streak for a third consecutive year of such gains.
The prospect of a "three-peat," or three consecutive years of 20%-plus gains, is even rarer. The only instance of this happening occurred during the bull market of the 1990s, where the market posted five consecutive years of returns exceeding 20%, fueled by the dot-com boom. This era serves as a cautionary tale, as it eventually led to the formation of a bubble. However, outside of this anomaly, a three-year streak of such gains has occurred only sporadically, with more moderate returns typically following back-to-back strong years.
To understand the potential for continued gains in 2025, it is essential to examine the factors that have contributed to the market's current rally. Several key drivers of this performance include economic growth, corporate earnings, and interest-rate policies. As the table of historical data on previous two-year market rallies suggests, the conditions that supported these past gains were varied, from post-war expansion to recovery from stagflation and economic boom periods.
Currently, the economic environment differs in several respects from those earlier periods. GDP growth, while positive, is not as robust as in some past instances, though a recession does not appear imminent. Additionally, the Federal Reserve is easing policy, whereas in many previous two-year rallies, it was tightening. Corporate earnings, meanwhile, are on the rise, contrasting with weakening profit trends seen in some earlier periods. These conditions suggest that, while another 20%-plus year in 2025 might be a stretch, the fundamental backdrop remains supportive of continued gains, albeit at a more moderate level.
Interest rates play a significant role in the stock market's performance, and the recent trend in rising U.S. Treasury yields has been a focal point for investors. The yield on the 10-year U.S. Treasury note has climbed steadily, reaching 4.08% in early October 2024, up from 3.98% at the end of the previous week. This increase reflects market expectations that the Federal Reserve may slow the pace of interest-rate cuts, given the strong economic data and persistent inflation concerns. Higher yields can affect corporate borrowing costs and valuations, making it more challenging for stocks to maintain their upward momentum.
Earnings season, however, has provided a boost to the market. Several major U.S. banks reported strong third-quarter results, exceeding analysts' expectations and lifting their stock prices. Overall, earnings for companies in the S&P 500 are expected to rise by an average of 4.1%, a positive signal for investors. Strong earnings growth is a key ingredient in sustaining market rallies, as it demonstrates that companies are able to generate profits despite economic challenges.
Inflation remains a concern for both the Federal Reserve and investors. The Consumer Price Index (CPI) for September 2024 came in slightly higher than expected, rising at an annual rate of 2.4%, down from 2.5% in August but still above the consensus forecast. Core inflation, which excludes volatile energy and food prices, rose to 3.3%, further complicating the outlook for interest rates. While inflation has moderated from its peak levels, it remains above the Fed's target, and policymakers continue to debate the appropriate pace of rate cuts.
The Federal Reserve's minutes from its September 2024 meeting revealed a robust debate among policymakers over the size of the most recent rate cut. While the majority of voting members supported a half-percentage point reduction, some argued for a smaller quarter-point cut, reflecting concerns over inflation and the strength of the economy. The Fed's path forward remains uncertain, but the market is pricing in high odds of another rate cut in the coming months.
Consumer sentiment, another critical factor influencing the market, slipped for the first time in three months in September 2024. The University of Michigan's Consumer Sentiment Index fell to 68.9, down from 70.1 in August, surprising economists who had expected a small increase. Consumer sentiment is closely watched because it can provide early indications of changes in spending behavior, which drives a significant portion of economic activity.
Stock buybacks, a common practice by corporations to return capital to shareholders, have also been on the rise. Companies in the S&P 500 spent nearly $878 billion on stock repurchases in the 12-month period ending in June 2024, up 8% from the previous year. However, buyback activity slowed slightly in the second quarter of 2024, with spending down 0.4% compared to the first quarter. Stock buybacks can provide a tailwind for market performance by reducing the number of shares outstanding and boosting earnings per share.
Looking ahead, investors will be watching closely for the release of the U.S. retail sales report for September 2024. Retail sales rose 0.1% in August, following a stronger-than-expected gain of 1.1% in July. Consumer spending accounts for a significant portion of U.S. GDP, and continued strength in retail sales could help support the case for further stock market gains.
As of mid-October 2024, U.S. stocks have extended their rally, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite each rising more than 1% for the fifth consecutive week. The Nasdaq, in particular, has been buoyed by strong earnings from technology companies, including Netflix, which saw its stock surge following a robust earnings report.
The yield on the 10-year Treasury note remains a focal point for investors, as it influences borrowing costs and the relative attractiveness of stocks versus bonds. While yields have risen recently, they remain below the levels seen earlier in the year, and the market is still pricing in high odds of additional rate cuts from the Federal Reserve.
Crude oil prices have also been a key factor influencing market sentiment. As of October 2024, crude oil prices had fallen to their lowest level since the beginning of the month, reflecting easing tensions in the Middle East and muted demand from China. Lower oil prices can benefit corporate profit margins and help keep inflation in check, though they have negatively impacted the energy sector.
In conclusion, while the stock market's performance in 2024 has been impressive, there are reasons to remain cautious about the outlook for 2025. History suggests that back-to-back years of 20%-plus gains are rare, and the conditions that supported these gains in the past were varied. While the current economic environment is favorable, with strong corporate earnings and easing monetary policy, challenges remain, particularly in the form of inflation and rising interest rates. Investors should be prepared for a more moderate pace of gains in the coming year, but the fundamental backdrop remains supportive of continued positive performance.
S&P 500 By Size & Sector
ETF Snapshots
US Investor Sentiment
%Bull-Bear Spread
The %Bull-Bear Spread chart is a sentiment indicator that shows the difference between the percentage of bullish and bearish investors, often derived from surveys or sentiment data, such as the AAII (American Association of Individual Investors) sentiment survey. This spread tells investors about the prevailing mood in the market and can provide insights into market extremes and potential turning points.
Bullish or Bearish Sentiment:
When the spread is positive, it means more investors are bullish than bearish, indicating optimism about the market’s direction.
A negative spread indicates more bearish sentiment, meaning more investors expect the market to decline.
Contrarian Indicator:
The %Bull-Bear Spread is often used as a contrarian indicator. For example, extremely high levels of bullish sentiment might suggest that the market is overly optimistic and could be due for a correction.
Similarly, when bearish sentiment is extremely high, it might indicate that the market is overly pessimistic, and a rally could be on the horizon.
Market Extremes and Reversals:
Historically, extreme values of the spread (both positive and negative) can signal turning points in the market. A very high positive spread can signal market exuberance, while a very low or negative spread may indicate fear or capitulation.
1-Year View
5-Year View
NAAIM Exposure Index
The NAAIM Exposure Index (National Association of Active Investment Managers Exposure Index) measures the average exposure to U.S. equity markets as reported by its member firms. These are typically active money managers who provide their equity exposure levels weekly. The index offers insight into how much these managers are investing in equities at any given time, ranging from being fully short (-100%) to leveraged long (up to +200%).
AAII Investor Sentiment Survey
The AAII Investor Sentiment Survey is a weekly survey conducted by the American Association of Individual Investors (AAII) to gauge the mood of individual investors regarding the direction of the stock market over the next six months. It provides insights into whether investors are feeling bullish (expecting the market to rise), bearish (expecting the market to fall), or neutral (expecting the market to stay about the same).
Key Points:
Bullish Sentiment: Reflects the percentage of investors who believe the stock market will rise in the next six months.
Bearish Sentiment: Represents those who expect a decline.
Neutral Sentiment: Reflects investors who anticipate little to no market movement.
The survey is widely followed as a contrarian indicator, meaning that extreme levels of bullishness or bearishness can sometimes signal market turning points. For example, when a large number of investors are overly optimistic (high bullish sentiment), it could suggest a market top, while excessive pessimism (high bearish sentiment) may indicate a market bottom is near.
