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Is the stock market running out of gas?
The markets have pulled back recently in the face of interest rate and geopolitical uncertainties. Is this just a speed bump, or is the stock market’s tank running on empty? Senior Strategist Craig Fehr breaks it all down for you.
Thanks for joining us today on this month's Market Compass. Well, after a sharp and steady rally that started last fall, markets have sputtered in the last few weeks. The pullback has been rather benign, but it's introduced a phase of volatility as the market's growing optimism has now been challenged by emerging geopolitical uncertainties and the prospects of interest rates staying high for longer than hoped. So is this just a speed bump or is the stock market running out of gas? Well, we think the answer to that lies within the responses to three important questions. Are we in a bubble? Is what got us this far going to get us further? And what's ahead, more potholes or more open road? We're going to dive deeper into these questions and more after the break.
Let's start with the broad question of, are we in a bubble? Now, that may seem like a silly question, but when we entered April with the stock market on a tear, stocks had risen sharply and steadily over the last five months, logging a gain of 27% from the end of October to the beginning of April, ascending to a string of new all-time highs. But it's been not only the size and speed of those gains, but also the driving force behind them-- that driving force being the run up in technology-- that's drawn comparisons to prior overheated markets.
A sharp run up in technology, most notably the mania around artificial intelligence, does look to us to have shades of euphoria, not because the future impacts of AI on the economy are misguided or even overstated, but simply looking at the price appreciation of certain technology investments, and maybe to a lesser extent the market as a whole, does at least warrant some attention in our view.
So the better than 20% return in the stock market over the last year has been powered, importantly, by a 50% gain from the tech sector, a dynamic that does really hearken back to the 1990s. But more concrete comparisons to the tech bubble are, to us, both premature and a bit overstated. First, while last year's stock market gain looks similar to the calendar year gains that we saw during the late 1990s, it shouldn't be lost that dotcom bubble was filled by 5 consecutive years of annual returns exceeding 20%-- impressive to say the least.
Perhaps more importantly, earnings across the dotcom stocks back then didn't back up those gains. In the 1990s, meteoric gains were occurring in unprofitable dotcom companies, many of which had tantalizing growth prospects, but no real viable or sustainable earnings base. Today, on the other hand, the enthusiasm is concentrated in the largest companies with prolific, as well as what we would call, defensible earnings.
So let's take NVIDIA, Microsoft, Alphabet, or Google, as we know it, Amazon, and Meta. Those companies generated a combined quarter of a trillion dollars in earnings in 2023 alone. So could we see slivers of reckoning in this most overheated space of the market? Of course. Does this raise the potential for disappointments that spark temporary pullbacks? Yeah. Does this pose a more structural threat that sends the overall equity market into a sharp or severe dive? We don't think so.
Now, the question becomes, is what got us this far going to get us further? So this current bull market officially began in October of 2022, which seems like a lifetime ago, with the latest stage of this expansion shifting to a higher gear over the last several months. The recent spate of gains has been driven by a few key factors-- rising valuations, rising expectations for near-term Fed rate cuts, and the excitement over technology and AI that's powered significant leadership from certain pockets of the market.
Looking ahead, I think there will be a key shift in a few of these drivers with the main fuel sources being earnings growth, less restrictive monetary policy and lower rates, and the broadening out of the overall bull market. Let's start with valuations. So valuations rose last year in anticipation of corporate profit growth ahead. We don't think those expectations are misplaced, and we expect rising earnings will be an important pillar of support as we move through 2024 with overall stock market gains likely approximating the pace of earnings per share growth.
We noted that expectations for Fed rate cuts have been a key element of recent gains. The pace of improvement in inflation has slowed in recent months. That much has been clear in the last few months of CPI reports, which has pushed back the timetable for when the Fed is likely to initiate an initial interest rate cut.
That's been the catalyst for the recent dip in stocks-- ironically, also the catalyst for the rise in stocks that we saw that started last October. So while we don't think the Fed will move to the back seat in terms of the influence for the overall markets, we do think that the focus will shift from simply the timing of a rate cut to the trends in inflation and economic growth ahead that transpire as the Fed remains on hold a little while longer.
And in terms of market leadership, we think we'll see some areas narrow the gap with technology and play a larger role in driving performance ahead. Last year, the majority of the S&P 500's gain was attributable to just a small number of mega-cap technology stocks, interestingly, with the top 10 stocks in the index growing to represent almost 30% of the S&P 500's total market cap, which raised the concentration and narrowed leadership. As the bull market advances, we think some of the lagging sector and asset classes will play catch up. This broadening out of the gains will, in our view, be a healthy trend that can support the bull markets longevity.
Now let's look out to the horizon. Is there more open road ahead or should we expect more potholes? Well, investors should expect a bumpier ride than we've experienced of late. To us, inflation and geopolitical tensions are the most prevalent threats. And as the election gets into full swing, political uncertainties here at home will likely add to some bouts of anxiety.
But keep in mind, even the healthiest of markets experience regular pullbacks with stocks, historically, averaging two 5% dips and one 10% correction per year. Importantly, however, we think the stock market has more room to run. While the market has dipped a bit here in April, it shouldn't be lost that we entered the month on the back of a string of record highs with the market eclipsing its previous high water mark in January.
The upshot, while history shows that bull markets don't tend to run out of gas after hitting new highs, in fact, the four of the last five instances saw stocks rise at least 40% beyond their previous peak. So while we think there's plenty of mileage left in this bull market, a potentially windier path ahead warrants a more disciplined strategy, as well as an opportunistic approach as we think bouts of market weakness can present compelling buying and rebalancing opportunities.
Your Edward Jones financial advisor can help you design and execute your plan to keep you on the road to your financial goals there's. Rarely perfect clarity when it comes to the investment markets. But what's clear to us is that market conditions are going to remain dynamic over the balance of this year. Tune back in to next month's Market Compass, where we'll continue to dive deeper into these topics to keep you on track.
Hello, everyone, and welcome to the March edition of Market Compass. In today's episode, we'll discuss a theme that we had highlighted in our annual outlook, the broadening of market leadership. Now, we know that stock market returns in 2023 were very narrow, led primarily by mega-cap technology, and a handful of stocks affectionately now known as that Magnificent Seven. So today, nearly three months into 2024, where do we stand?
Now, markets have certainly moved higher with the S&P 500 up over 8% this year as of mid-March, but has market leadership expanded beyond that Magnificent Seven? And if so, what are the conditions we need to see in place to see further broadening of leadership? We'll go through this and more in this episode.
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So in 2023, we know that stock markets were led by a pretty narrow group of stocks and sectors, primarily in that mega-cap technology space, and driven by that growing enthusiasm around artificial intelligence and generative AI broadly. However, this year we are seeing overall a broader group of sectors and asset classes that are outperforming. Let's take a look first at the S&P 500 sector returns.
Now last year, if you recall, sector returns were led by three sectors, technology, communication services, and consumer discretionary, all of which were up by over 40% for the year. Now, these are also the growth sectors of the market that house all of large cap technology and the Magnificent Seven names as well. So what are we seeing this year?
Indeed, we are seeing broader sector leadership, areas like financials, energy, industrials, and health care are all up over 6% thus far. And similarly, if we look at asset-class performance more broadly, we see that while technology parts of the market are continuing to lead in 2024. There is some notable catch up in the broader S&P equal weight index, the high quality S&P dividend payers, as well as parts of international markets. And although bond markets remain slightly negative this year, in our view, we could see this asset class perform better if interest rates move lower later this year.
So what are the conditions in place that we would need to see for market leadership to broaden. First, we would expect to see the Federal Reserve and central banks around the globe to embark on a rate cutting cycle this year. Now, the Federal Reserve has told us that it is getting closer to seeing the evidence it needs to start those rate cuts in 2024. We do believe that around three rate cuts are likely later this year, perhaps starting in the June or July time frame.
Now, this is largely because we see inflation continuing to moderate in the months ahead, albeit not in a straight line lower, but driven by ongoing moderation in the shelter and rent components of the inflation basket, and some softening in services inflation. Now, keep in mind that as interest rates move lower, stock market valuations historically have more scope to expand, which we think is an important driver for better performance, especially outside of technology.
Next, we believe earnings growth should materialize this year across many sectors in 2024. Again, last year, S&P earnings growth was modest, up about 1% annually, and the biggest drivers were growth sectors, including communication services and consumer discretionary. Now, this year we're seeing S&P 500 earnings growth in the 5% to 10% range, driven by a broader group of sectors. Areas like health care, financials, industrials, even utilities are expected to contribute to growth alongside technology and growth sectors.
So a broadening and earnings growth in our view is also a driver for a broadening of market leadership. And finally, while the economy may soften a bit, we expect economic growth to remain positive and perhaps even re-accelerate in the back half of the year. The US economy has been quite resilient in the face of rising interest rates. In fact, the average annualized growth in 2023 was about 3.1%. That's well above trend growth rates of 1 1/2 to 2%.
However, this year we would expect to see some softening in economic growth, still positive, perhaps below recent levels. Now, this comes as consumer spending and the labor market may moderate as well. However, as we head towards the back half of the year, if inflation eases and the Fed begins rate cuts, we could see a re-acceleration in growth as well. Now this is a backdrop, which we believe favors a broadening of leadership, particularly in areas like cyclical sectors and mid and small cap stocks.
Now, overall, equity markets have held up nicely thus far in 2024, driven by a broader set of stocks and sectors. However, like in any given year, we would expect bouts of volatility to emerge. In fact, two to three pullbacks in the 5% to 10% range are the norm historically. Nonetheless, we would view market volatility as an opportunity for investors to add quality investments to portfolios, as well as to think about diversifying portfolios for a potential broadening of market leadership.
Now, we believe growth in technology investments should be complemented with cyclical and value style investments, as well as mid-cap stocks and investment grade bonds, all of which we believe have the potential to play some catch up in the year ahead. Now you can head to edwardjones.com for more insights, and market commentary. And you can always reach out to your financial advisor, who can help you tailor a portfolio that will put you on this path to meet or even exceed your unique financial goals. So with that, I thank you. And we'll see you right back here for the April Market Compass.
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Hello. I'm Angelo Kourkafas. Welcome to the February edition of Market Compass. Today, we'll focus on the state of the US consumer, which has been the strongest cylinder of the US economic engine over the past 12 months. However, there are plenty of headlines about record credit card debt, which raises questions about whether the consumer is tapped out after a post-pandemic spending spree. In our view, the US consumer is not running out of gas, but we do expect a modest slowing ahead.
Let's start with why the health of the consumer is very important. To begin with, the US is mostly a service-based economy largely reliant on domestic spending. Personal consumption accounts for 2/3 of US GDP. And as a result, the consumer is really the backbone of the economy, therefore, the saying, as the consumer goes, so goes the economy.
And the consumer story has been a positive one so far. Despite high borrowing costs and last year's spike in inflation, the consumer has kept spending at a robust pace, helping keep the economy out of recession. But can that positive momentum continue? According to the New York Fed, Americans have accumulated a record-breaking $1 trillion in credit card debt. We actually crossed that threshold late last year and have kept adding to it since, with credit card balances having grown by 64% since 2003.
This record level of credit card debt no doubt is generating some headlines and just by itself would imply that the consumer is getting tapped out. But thankfully, we don't think that's the case. To use an analogy, the fact that a tree might grow very tall doesn't necessarily imply that it is at a higher risk of falling because it most likely has deeper roots supporting that height.
Similarly, if we look at what's supporting consumer spending, it is not just credit card debt. On the graph, we see household net worth, assets minus liabilities, which has grown 223% since 2003. So the fact that credit card debt is at an all-time high shouldn't be such a surprise.
Another way to assess how stretched households are is to look at whether consumers can pay for all of this debt. Debt payments as a percent of disposable income, or what we call the debt service ratio, it is at the low end of its 40-year range. In simple terms, rising incomes are helping support the high levels of debt that we see.
But that's not to say that there are no cracks, small cracks, starting to appear. Delinquency rates are on the rise, but from very low levels, as you can see. So for now, we can describe that as normalization, a return to the pre-pandemic conditions. In our view, these are small signs of fatigue, which suggest that spending will slow, most likely, over the course of the year. But the consumer remains in decent shape.
Wage gains are supporting incomes and spending. Inflation pressures are receding. And assets like real estate and stocks are appreciating. And all that is contributing to the rise in consumer confidence. On top of that, the labor market remains healthy with still more job openings than before the pandemic and more openings than the number of people seeking work.
With that as a backdrop, let's talk about the economic and market implications. We think the economic expansion will continue even as a downshift in consumer spending will likely produce more muted growth in the next couple of quarters. But as the consumer slows, areas that have been in decline since last year, like housing and manufacturing, are starting to stabilize and will likely re-accelerate as the Fed pivots to rate cuts in the summer.
With the economy likely continuing to chug along and interest rates lower, we see opportunities for investors to rebalance and reinvest some of the cash and sitting money in both equities and bonds. Also, we think that segments of the market that have been left behind, like mid and small cap stocks as well as value-style investments, will start to catch up and leadership will broaden.
Despite the really magnificent returns of the Magnificent Seven mega-cap tech companies, we think that diversification is still important. And proper balance has the potential to enhance returns in 2024. For more information on some of the action steps that we discussed in this month's episode, please reach out to your financial advisor. Thank you all for joining us.
So in our January edition of Market Compass, we take a look at the handoff from 2023 to 2024. And more specifically, let's talk inertia, which we'll all remember from science class, is the principle that objects in motion tend to stay in motion until acted upon by another force. So with last year finishing on a strong upswing, the question is, will 2024 continue where 2023 left off? And what are the forces that are going to influence that direction? Here's our take.
Let's start with our view on the economy, which we think will lose some momentum in 2024 but won't come to a halt. So if we think about the handoff from '23, the economy was exceptionally strong as we mentioned defying gravity in 2023. Particularly because consumer spending remained quite robust. Now as we look forward to '24, we think some of that momentum can continue, but we do think we're going to see some softness emerge.
The Fed put the brakes on last year and consumer tailwinds like wages and accumulated savings are now starting to fade. But both should start to show up a little bit more acutely this year. But we do think that there's still gas left in the tank for the economy. In particular, unemployment is still low, just a shade above a 50-year low on the unemployment rate. And is only likely to rise moderately this year in our opinion.
And importantly, parts of the economy like manufacturing and housing construction and investment are now starting to show some signs of turning higher after contracting last year. So all told, we think that conditions will start to soften in the economy, but then begin to reaccelerate in the latter part of 2024. The Fed has been a key influence on the markets for the past several years, that's not likely to change in 2024.
We think that the Fed will stay on hold for a while longer, but eventually start to cut rates later in 2024. Now let's quickly reference back to the handoff because as we came through the tail end of '23 and into '24, the Fed was on the sidelines holding rates steady coming into the year. We think that will persist in the first half of 2024 before the Fed eventually begins to start cutting rates in the second half. Now more broadly, 2024 will be a year in which monetary policy settings get less restrictive.
And importantly, that tends to be quite favorable for the stock market, the bond market, and the economy. Interestingly though, we do think some misaligned expectations between what the market is anticipating and what the Fed is likely to do can produce some volatility. And more specifically, markets are expecting the Feds to start cutting rates early in '24 and steadily throughout the year. We think that the commencement of those rate cuts is probably to start a little bit later.
The broader takeaway, however, is that heading up to the first rate cut and in the period after the first rate cut, we do tend to see the stock market perform quite well. Now if we look at a broader picture of interest rates beyond just the short-term policy rate, what we'll see is, since 1960, we have seen rates rise but then declined steadily for almost 40 years since the early '80s.
More recently, we've seen rates rise off of those lows over the past couple of years, that's what drove market performance in '22 and in '23. So as we head into 2024, we don't think that sharp decline in rates at the tail end of '23 will continue into this year. And in fact, we think rates could probably moderate over the course of this year before ultimately migrating slightly lower as we move through the year.
So let's talk about the stock market. We think the bull market in equities will continue in 2024, but we doubt it will match the vigor of 2023. And importantly, if we think about that handoff from last year, stocks rallied sharply in the final two months of the year to ultimately cap off what was a very, very strong year for the US stock market. We think volatility could probably be the same as we saw in '23.
Meaning we saw a few episodes in March and again throughout the fall where stocks pulled back, but broadly produced overall gains for the year. We think we'll build on those gains in 2024. But importantly, we think the complexion and the leadership of the market can start to rotate. So let's take a look at a graphic and we'll bring this to life a little bit more. This is what we refer to as our jelly bean chart.
And really what it captures is the performance of different-- what we would call asset classes or investment areas throughout each year, in this case over the last 10 years. If we just focus in for a second on the box titled US large cap stocks, I think about that as the S&P 500 or the US stock market for large companies. You'll see it doesn't consistently live at the top or the best performer or at the bottom or the worst performer, and instead can bounce around.
If we focus in on 2023, we saw there were strong gains for the US stock market. As I mentioned, we think those can continue as we move through 2024. But the leadership is going to rotate. And I'll point out, importantly, we think we're going to see a broadening out of stock market gains in 2024. Looking back in '23, the gains were primarily led by large technology companies.
And in fact, so-called Magnificent Seven, so the seven largest tech companies in the US, accounted for about 90% of the stock market's gains in 2023, which is remarkable. As we move into '24, we think that leadership in those gains can broaden out across the stock market, and importantly, across other asset classes which really speaks to the importance of having a well-diversified, well-balanced portfolio as we move through this year.
The performance of the stock and bond markets have obviously been in focus in recent years. But interestingly, it's CDs that have returned to the spotlight more recently. Now importantly, as we look into 2024 as strong and as high as CD and cash yields have been more recently, we think they're going to be outshined moving forward. Let me explain what I mean.
While cash and CD yields rose to their highest levels in decades more recently, and interestingly what we saw was, as stocks and bonds pulled back in 2022, cash was one of the better performers in a diversified portfolio. That switched in 2023 with stocks and bonds outperforming and cash trailing. Now as we head into '24, that handoff means that we're probably going to see, in our opinion, stronger returns from stocks and bonds in the coming year with some lagging returns in cash.
Now, importantly, those higher yields for CDs and cash might feel risk free, but those strong gains in stocks and the sharp drop in interest rates toward the tail end of '23 highlight two things. One, the opportunity cost of hiding out in cash. And two, the reinvestment risk of CDs meaning that as CDs mature and that money comes due, it has to be reinvested and potentially at lower yields.
So let's dive deeper. If we look back over the last 40 years, equities or stocks on average have delivered healthy returns following the peak in CD yields. And importantly, we do think that CD yields have peaked more recently. And so the moments when CD yields looked particularly alluring were actually more compelling opportunities to diversify into things like stocks and bonds.
Now importantly, this is not to suggest that there isn't a place for cash or CDs in a well diversified strategy. But based on our outlook, we think now's a good time to ensure you're not overweight to those areas. To us, this looks like a good time to systematically redeploy maturing CDs or your excess cash to help you keep your entire portfolio aligned to your longer-term needs.
So as we lean back and look out over the entirety of 2024, we think that the bull market for stocks as well as the rebound in bonds can remain headed in a positive direction. That inertia, so to speak, that we built coming out of 2023. But unlike the sharp and steady rally in the months leading into this year, we do expect a bumpier path higher as we advance.
We think the shape of 2023's gain creates a compelling opportunity to rebalance portfolios back to intended targets across an array of asset classes and sectors within your portfolio. Kicking off 2024 with an appropriate portfolio balance and alignment with your long-term goals can help position you to navigate the year ahead. As always, you can access all of our views and market content at edwardjones.com, and by connecting with your Edward Jones financial advisor.
Hello, everyone, and welcome to the December Market Compass. Now, as we head into year end, perhaps to enjoy some well-deserved holiday cheer, we’re all hopefully reflecting on a successful 2023, and looking forward to 2024.
Now, in this edition of Market Compass, we’ll focus on our outlook for 2024, what we see happening in the economy with the Fed, with inflation, and of course, how do we think about portfolio positioning as we enter the new year. You can go to edwardjones.com to watch the full episode.
What happens with economic growth? The U.S. economy was quite resilient in 2023. Economic growth was at or above trend levels of 2%. Now, in 2024, we expect the US economic growth to remain positive, but soften in the first half of 2024. Growth rates will likely fall to below 1.5% annualized.
Now, we do believe that somewhat weaker consumption, lower government spending, and a cooler labor market will translate to slower growth. The consumer faces some challenges heading into 2024. Those include declining excess savings and rising credit card debt. In addition, we believe some loosening in the labor market may put downward pressure on wage gains. But on the positive side, a slowdown in growth could potentially support lower inflation and less need for further Federal Reserve tightening.
Now, as we look toward the second half of 2024, we do expect the economy to gradually accelerate once again. We believe lower inflation rates, a Fed that is possibly signaling rate cuts and better earnings growth will lead to improving economic growth later in 2024. And remember, markets are forward-looking, they can start moving higher even before economic growth stabilizes and improves.
Does the Federal Reserve cut rates in 2024? Now, at the core of our outlook for the markets is the trajectory of Fed policy. We believe that after the most aggressive tightening campaign in 40 years, the hiking cycle is now complete.
The Fed will likely proceed with caution, perhaps even signaling an extended pause, and keeping that Fed funds rate at 5:00 and 1/4% to 5.5% early in the year. But we believe that easing inflation pressures, a cooling labor market and a slowdown in growth will likely pave the way for interest rate cuts in 2024.
In our view, the Fed will likely cut more than the two cuts it outlined at the November FOMC meeting, but perhaps less than the 5 to 6 cuts that markets have priced in.
We believe that if the Fed funds rate is at 5 and 1/4 to 5.5%, longer term neutral rates are closer to 2 and 1/2 to 3%, and inflation is moderating, then there’s less need for the Fed to remain this restrictive. All this to say, we see a Fed rate cutting cycle emerging in 2024.
Can inflation continue to moderate? The trajectory of inflation is another key driver of our outlook in 2024. Now, we’ve seen progress in 2023 thus far. Headline CPI inflation in the US has fallen from a high of 9.1% in June of 2022, all the way down to 3.2% at the November reading. Core inflation also moved lower from 6.6% to 4%.
Now, while the last mile down to the Fed’s 2% target may be gradual, and even a bit bumpy, we do see core inflation heading towards 2.5% in 2024. Now, there are a couple of reasons for this.
First, the shelter and rent components of inflation, which make up nearly 40% of the basket, have softened in real time, and typically show up with a lag in the CPI figures. So we believe this will put downward pressure on inflation in the months ahead. And secondly, we believe wage gains will continue to moderate. That will help cool services inflation as well. So overall, we see the downward trend in inflation that began in 2023 continuing in 2024.
What does this mean for your portfolio in 2024? So after solid returns in 2023, we do see opportunities in both equities and bonds for 2024. Now, keep in mind, bear markets, like the one we saw in 2022, are historically followed by positive returns. In fact, often, these periods can last for several years.
So how do we think about portfolio positioning as we head into the new year? For stocks, if a key theme in 2023 was narrow leadership with large cap technology, or the so-called Magnificent Seven driving much of the gains, then perhaps we would view 2024 as the year when laggards play some catch up.
So we recommend complimenting growth investing with some of these lagging assets. That include cyclical and value sectors, as well as small cap stocks, which could play some catch up in 2024.
Now, with artificial intelligence still in the early innings of multiyear growth. We still view this space favorably. But we do see diversification beyond technology more critical to portfolio returns in 2024, especially as valuations are more favorable outside of these areas as well.
And in bonds, we do recommend complementing your cash-like investments, including CDs, money market funds, with longer term investment grade bonds. These bonds can help you lock in these historically high yields for a longer period, and they may also appreciate as the Fed makes further progress towards its 2% inflation, and over time, cuts rates as well.
Using volatility to your advantage. So as we look ahead to the next 12 months, we do expect 2024 to be a positive year in markets. But like any other year, it will have its share of volatility as well. We believe balance and diversification in your stock portfolio and bond portfolio can help you position to maximize return potential for the year. And this is also where your financial advisor can come into play. They can help ensure you have exposure in your stocks and bonds that is tailored to your specific financial goals and risk tolerance.
At the end of the day, you can use market volatility to your advantage to rebalance, diversify, and add quality investments at better prices, ultimately to meet or exceed your long-term financial goals.
So if you are interested in our 2024 market outlook, head to edwardjones.com to read the full report. And thank you again for your viewership. We wish you all a very happy and healthy holiday season. And we’ll see you back here in the new year for the January Market Compass.