Fall is in the air and we have no shortage of interesting developments in the markets. Investors are keeping a close eye on the election, core inflation numbers, big tech earnings (specifically large expenditures around artificial intelligence R&D), and any further reduction in short term interest rates that the Fed is likely to do before the end of the year.
Market Update
Here’s a quick rundown of the major U.S. stock and bond indices performance year-to-date as of November 1st, 2024:
Stocks:
S&P 500: 20%
Dow Jones Industrial Average: 11%.
Nasdaq 100: 21%.
Bonds:
Aggregate Bond Index: -1.54%
Short-Term: -0.06%
Long-Term: -8%
Much of the positive performance in the stock market remains concentrated in, and attributed to, a few large technology companies. While perhaps concerning in terms of being top-heavy, these industry-leading technology giants continue to drive innovation and shape the future of the market.
The volatile bond market (or yield curve) still remains inverted where short term bonds or money market funds are yielding more than long-term securities. We are in uncharted waters now where the inversion has been in place longer than historical periods without a recession occuring. The market is currently pricing in a soft landing where no recession is coming and the economy stays strong amidst a changing interest rate environment.
The following chart shows historical periods of yield curve inversions and the time frame to highs in the S&P 500 and/or a recession.
We are over 800 days since the 2-year and 10 year treasury yields became inverted and over 700 days since the 3 month and 10 years did the same. It will be truly remarkable if the Federal Reserve can pull this off and would be a testament to the resilience of the US labor market and economy. Historically, this has never really happened and we are doing our best to prepare for either an unforeseen recession, or continuation of the currently strong bull market.
Bonds continue to be a volatile asset class even in a falling interest rate environment where intermediate length (5-10 years) and longer term (10-30 years) rates have actually been pushing higher in the face of short-term rate cuts by the Fed and other central banks. This would seem to indicate the bond markets believe the fight on inflation is not yet over, but time will only tell who will be right.
We have maintained a strong focus on keeping our bond portfolios concentrated in U.S. highly rated areas where the current yield might be lower than short term rates, understanding that prices will go much higher as long-term rates come down. The following chart shows historical periods where keeping investments in 3-month treasuries, because they had a higher yield compared to longer duration bonds, would have resulted in much lower total returns (interest paid plus price appreciation) over the next 24 and 60 months.
Portfolio Allocations
Our stock portfolios remain balanced between, and tilted towards, U.S. technology growth and high dividend paying funds. These two areas tend to be relatively uncorrelated to one another, and should provide some defense against an unforeseen recession but also provide growth in the soft landing scenario.
Regarding bonds, there have been two separate periods during 2024 where interest rates on the 10 year treasury have dropped and the price increases have been remarkable. We believe it’s prudent in this situation to use history as a guide and ride out of the short term rate increases to focus on a total return expected to exceed returns on short-term bond or money market instruments.
As we approach the end of the year there will be many tax, estate, and investment planning discussions to be had and we look forward to our ongoing conversations and collaboration with each of you.