Last week, investors breathed a sigh of relief when the latest price data showed core inflation, which excludes volatile food and energy prices, moved lower in December. Investors has been worried because economists forecasted inflation would be stickier in December, reported Frank Lee of Morningstar. If that proved out, the Fed might have stopped lowering the federal funds rate, which would have had adverse implications for company performance and stock prices. So when core inflation dropped to 3.2 percent year over year, investors celebrated. Some think the celebration might be premature. Jacob Sonenshine of Barron’s reported, “Stocks jumped after this week’s inflation data. The problem is that there’s not a lot to love in the numbers. The reality is that inflation remains well above the Federal Reserve’s 2 [percent] goal. The average headline [Consumer Price Index] has been 2.7 [percent] in the past three months, above the 2.6 [percent] average for the three months that ended in September. So the trend of inflation, when considering a larger sample size of results, is inching higher, not lower…The result is that the Fed is unlikely to reduce interest rates aggressively. The federal-funds futures market now expects just one interest-rate cut this year…” Inflation wasn’t the only reason investor optimism surged last week, though. Fourth quarter earnings season—the time when management lets investors know how the companies performed in the prior quarter—got off to a strong start. “Big Banks set a positive note earlier this week, while [a large semiconductor company] sparked further enthusiasm among chip stocks. Things will only heat up in the weeks ahead, as Wall Street sizes up results from the market's heaviest hitters,” reported Connor Smith of Barron’s. We should all be prepared for markets to be volatile this year. While last week delivered attractive gains overall, the week before stock and bond markets moved in the opposite direction. Jurrien Timmer of Fidelity explained why we may see significant volatility this year: “While I continue to believe we are in a bull market—with rising earnings poised to pull the weight of the market still higher—this recent volatility could be a sign of things to come. Later stages of a bull market tend to be more volatile. And it doesn’t take as much to disrupt the market’s mojo when valuations like price-earnings (PE) ratios are high, as they have been. But moreover, I believe the interest-rate angst that’s been weighing on the market isn’t likely to go away anytime soon, and could be a recurring feature of the year ahead.” Last week, major U.S. stock indices rose sharply, and yields on longer maturities of U.S. Treasuries fell.

Not one, but two! United States stock markets are serving another cup of cheer this year. The Standard & Poor’s (S&P) 500 Index returned more than more than 24 percent in 2023. This year, it was up 26.5 percent through the end of November. It’s possible 2024 will end up in Wall Street’s bull market hall of fame, wrote Jan-Patrick Barnert of Bloomberg, because the year-to-date return of the S&P 500 ranks among its best performances of this century. “Not many expected another blistering rally fueled by a handful of tech titans and market sentiment so bullish that one risk event after another got cleared without a scratch… Market swings were benign, with only one big valley of tears: a summer pullback that culminated in a small selloff around early August. The drop lasted for just less than a month and failed to cross the threshold of 10 [percent], typically seen as a correction.” On a relative basis, U.S. stock markets have significantly outperformed stock markets elsewhere. Consider the performance of a few non-U.S. indexes through Thanksgiving. Index name Year-to-date return (thru Nov. 28, 2024) MSCI Europe 0.98 percent MSCI Europe, Australia and the Far East (EAFE) 2.95 percent MSCI Emerging Markets (EM) 5.46 percent MSCI Japan 6.14 percent MSCI China 12.91 percent MSCI India 13.54 percent Over the year, the number of U.S. stocks participating in the rally rose. “The rally is broadening out…more stocks are advancing than declining. Typically, that phenomenon bodes well for the entire stock market. It’s a sign of better market breadth, meaning that the major indexes aren’t being led by just a small handful of stocks,” reported Paul R. La Monica of Barron’s. However, La Monica also cautioned against becoming complacent, “…given how long it has been since Wall Street has faced any significant obstacle, it isn’t entirely clear what might happen if market or economic conditions suddenly head south.” Last week, stocks jolted up and down as investors responded to data about political appointments, tariffs, and inflation data. By the end of the week, major U.S. indices were higher. Treasury bonds gained, too, as yields moved lower after president-elect Donald Trump nominated hedge-fund billionaire Scott Bessent to be U.S. Treasury Secretary. Many believe Bessent could be a moderating influence when it comes to taxes, tariffs, and the deficit, reported Mitchell Hartman of Marketplace.

The United States stock market changed course. Last week, the strength of the United States economy slowed investors’ roll. Federal Reserve (Fed) Chair Jerome Powell told business leaders in Dallas, Texas, that the performance of the United States economy has been “remarkably good,” better than any major economy in the world, which gives the Fed “the ability to approach our decisions carefully.” Powell’s comments caused investors to reassess the likely pace of rate cuts. As they did, the probability of a December rate cut fell sharply, according to the CME FedWatch Tool. The likelihood that the Fed may lower rates more slowly than expected roiled markets. Lu Wang, Isabelle Lee, and Emily Graffeo of Bloomberg reported, “With the world’s most important central banker in no hurry to ease monetary policy thanks to a still-robust labor market and strong economic data, bond yields once again rose and dragged stocks lower in their wake. Down 2 [percent] over five sessions, the S&P 500 erased half of its trough-to-peak gains since the election. Combined with losses in corporate credit and commodities, the week rounded out a pan-asset retreat that by one measure was the worst in 13 months.” Investors’ changing outlook was shaped by other factors, too. These included: · Elevated stock valuations . Bella Albrecht of Morningstar reported, “The U.S. stock market is trading at an 11 [percent] premium to its fair value estimate.” The data reflected share prices on November 13, which was midway through last week. · The risk of inflation rising again . Many economists believe the incoming administration’s spending and tax policies have the potential to reignite inflation, which could lead the Fed to reassess monetary policy. · A disrupting cabinet nomination . Robert F. Kennedy Jr. to lead the Department of Health and Human Services rattled healthcare and consumer staples sectors of the market. “Shares of biotechnology and pharmaceutical companies fell, with the S&P 500 Pharmaceuticals index down about 2 [percent]. Shares of packaged food and beverage giants…also declined,” reported Samuel Indyk and Ludwig Burger of Reuters. By the end of the week, major U.S. stock indices were down. U.S. bond markets continued to be wary of tariffs and inflation, lifting the yield on the benchmark 10-year U.S. Treasury to 4.5 percent. By week’s end, though, the 10-year Treasury yield had settled at 4.3 percent, reported Liz Capo McCormick of Bloomberg.

Financial markets appear to have pre-election jitters. The United States election is less than two weeks away. The candidates are neck and neck. The outcome remains uncertain. And expectations for volatility have been rising, with the CBOE Volatility Index (VIX) finishing last week at 20.33. “When the VIX goes north of 20, Wall Street pays attention because that level signals heightened volatility,” reported Connor Smith of Barron’s. One reason for heightened volatility may be concerns about the election. Ian Salisbury of Barron’s explained, “There are plenty of theories about how particular stocks will fare, depending on next month’s outcome. It isn’t hard to see why. The candidates have tried to curry favor with voters by championing or attacking favored industries, and sometimes individual companies. Vice President Harris has promised to raise the corporate tax rate, a move that could cut into corporate earnings, and Democrats are widely seen as tougher on antitrust issues, a potential hurdle for Wall Street banks looking to capitalize on pent-up [merger and acquisition] activity. Trump, meanwhile, has threatened hefty new tariffs, which could help U.S. manufacturers but hurt multinationals. He’s even threatened individual companies like John Deere over plans to move manufacturing facilities abroad. The good news? Investors can mostly shrug the campaign rhetoric off and focus on stocks’ fundamentals.” So far, third-quarter earnings reports have been strong. Regardless, stock market investors became significantly less bullish last week, according to the AAII Investor Sentiment Survey. The survey asked investors whether they think the stock market will move higher (bullish) or lower (bearish) over the next six months. · Bullish sentiment declined from 45.5 percent the week of October 16 to 37.7 percent last week. (The historic average for bullishness is 37.5 percent.) · Bearish sentiment increased from 25.4 percent to 29.9 percent. (The historic average for bearishness is 31 percent). · Neutral sentiment also increased from 29.2 percent to 32.4 percent. (The historic average is 31.5 percent.) Bond investors also have been adjusting their expectations. Since mid-October, the yield on the benchmark 10-year U.S. Treasury note has trended higher. At the start of the month, the 10-year note yielded 3.74 percent. Last week, its yield rose from 4.07 percent to 4.23 percent. “The rise is likely a reflection of the fact the Federal Reserve will cut interest rates fewer times than investors had thought after September’s Federal Open Market Committee meeting, a result of inflation being above its target and a job market that has grown faster than expected. Also, Donald Trump’s chances of winning the presidential election have risen in the past few months, according to RealClearPolitics. His policies include fiscal spending and tariffs, both of which create inflation and throw cold water on the idea that the Fed will cut rates many times. While the economy could continue to grow, tariffs, for their part, not only lift prices, they destroy demand,” reported Jacob Sonenshine of Barron’s. Ben Levisohn of Barron’s offered some advice to anyone getting swept up in pre-election jitters. “The truth of the matter is that reading the financial market tea leaves is far from straightforward…In fact, investing with your politics is one of the worst ways to lose money—or miss out on gains.” If you have concerns about market volatility or the possible effect of the election on your portfolio, get in touch. We’re happy to talk with you about your concerns and your portfolio.

The Standard & Poor’s 500 Index closed above 5,800 for the first time—and that’s not all. The Dow Jones Industrial Average also notched a record high last week—and all three major U.S. stock indices ended the first full week of October with gains of more than one percent. There was good economic news, too. Inflation continued to slow in September. The Consumer Price Index showed headline inflation was 2.4 percent annualized—the smallest annual increase since February 2021. Consumers are feeling better than they did a year ago. “[Consumer sentiment] is currently 8 [percent] stronger than a year ago and almost 40 [percent] above the trough reached in June 2022,” reported University of Michigan Surveys of Consumers Director Joanne Hsu. The economy continues to grow. After inflation, the U.S. economy grew by 3 percent in the second quarter of 2024. Forecasts project that economic growth in the third quarter will be 3.2 percent. Wages have grown faster than inflation. In September 2024, average hourly earnings were up 4 percent. After inflation, they were up 1.5 percent. Of course, that’s a broad reading for the entire country and may not reflect individual experience. “By just about every measure, the U.S. economy is in good shape. Growth is strong. Unemployment is low. Inflation is back down. More important, many Americans are getting sizable pay raises, and middle-class wealth has surged to record levels. We are living through one of the best economic years of many people’s lifetimes…The United States has nearly 7 million more jobs than it did before the pandemic, and the largest share of 25- to 54-year-olds working since 2001,” reported Heather Long of The Washington Post. It's remarkable that many Americans still don’t recognize the strength of the economy. Last week, a Harvard Caps/Harris Poll found that, “63 [percent] of voters believe the U.S. economy is on the wrong track and 62 [percent] characterize it as weak, consistent with perceptions over the past year.”

Living the realities of risk and reward. Asset allocation is important because it helps investors manage the risk and rewards of investing. In general, investments have different levels of risk and the potential return (or reward) for taking that level of risk is a higher return. For example, investing in stocks typically has greater risk than investing in quality bonds or cash. In return for taking a higher level of risk (i.e., tolerating the ups and downs of the stock market) investors have the potential to earn higher returns. Quality bonds have less risk that stocks and offer lower return potential, and cash/cash equivalents has the least risk and the lowest return potential. During the third quarter of 2024—July through September—the stock market offered a lively ride that demonstrated the concept of risk and reward. Major U.S. stock indices bobbed up and down throughout July before dropping sharply in the first week of August when the July unemployment report lagged expectations. The news caused investors to wonder whether the Fed had waited too long to lower rates, the economy was slowing too quickly, and a recession might be ahead, reported Will Daniel of Fortune via Yahoo!Finance. The stock market rebounded over the remainder of the month as inflation continued to trend lower and economic data remained robust. Then, during the first week of September, the number of new jobs created in August was lower than predicted and investor confidence stumbled again. Uncertainty led to a sharp—and short-lived—decline in stock prices. From that week on, U.S. stock prices trended higher. Over the quarter, the dips and dives of the stock market made many investors’ stomachs drop, but by the end of the quarter, stock prices overall had moved significantly higher. Josh Schafer and Karen Friar of Yahoo!Finance reported: “Wall Street indexes recorded monthly wins to close out the last trading day of September. Notably, the S&P 500 notched its best year-to-date performance at September's end since 1997…Over the last three months, the Dow led the major indexes' gains, up 8.2 [percent]. The S&P gained 5.4 [percent], and the Nasdaq added nearly 3 [percent].” Investors appear to have set aside worries about the U.S. economy and rightfully so, according to Mark Zandi, the chief economist at Moody's Analytics. At the end of September, he wrote: “I've hesitated to say this at the risk of sounding hyperbolic, but with last week’s big GDP revisions, there is no denying it: This is among the best performing economies in my 35+ years as an economist. Economic growth is rip-roaring, with real GDP up 3 [percent] over the past year. Unemployment is low at near 4 [percent], consistent with full employment. Inflation is fast closing in on Fed’s 2 [percent] target—grocery prices, rents and gas prices are flat to down over the past more than a year. Households' financial obligations are light, and set to get lighter with the Fed cutting rates. House prices have never been higher, and most homeowners have more equity in their homes than ever. Corporate profits are robust, and the stock market is hitting a record high on a seemingly daily basis. Of course there are blemishes, as lower-income households are struggling financially, there is a severe shortage of affordable homes, and the government is running large budget deficits. And things could change quickly. There are plenty of threats. But in my time as an economist, the economy has rarely looked better.”

The Standard & Poor’s (S&P) 500 Index hit a new all-time high last week. The S&P 500 has had quite a year. Despite a sharp downturn in August when investor confidence was ruffled by concerns about economic growth, the Index was up about 20 percent, year-to-date, at the end of last week. The gains were widespread with all sectors of the Index participating, according to data from Fidelity. Last week, investor enthusiasm was bubbling up. There were a lot of reasons for their optimism. First, investors were encouraged by the Federal Reserve’s rate reduction earlier this month and expectations that the Fed will continue to reduce the federal funds rate further to support economic growth. Jacob Sonenshine of Barron’s explained the advantages conferred by the Fed’s actions: “Lower rates would only boost consumer spending on housing and other goods and services—a demand picture that will spur investment from companies, helping the industrial economy specifically. This all means companies’ profit growth could easily extend from next year into 2026. Analysts expect S&P 500 companies, in aggregate, to generate annual sales growth just above 5 [percent] over the coming two years, according to FactSet.” Second, a round of positive economic news helped investors set aside any lingering concerns about economic growth. Brian Evans and Lisa Kailai Han of CNBC reported: “A slate of fresh data supported a solid economy, easing fears that perhaps the Federal Reserve is cutting rates aggressively because of a potential slowdown. Weekly jobless claims fell more than expected, pointing to a steady labor market. Durable goods orders for August were unchanged versus economists’ expectations for a decline. Further, the final reading of second-quarter Gross Domestic Product (GDP) was unrevised at a strong 3 [percent].” In addition, inflation continued to trend lower in August. The Fed’s favored inflation gauge, the personal consumption expenditures index, indicated prices rose 0.1 percent. Megan Leonhardt of Barron’s reported: “The August pace [of inflation] was also lower than consensus calls…The latest data show that the annualized three-month core Personal Consumption Expenditures (PCE) is currently running below the Fed’s 2 [percent] inflation target. It should help erase any doubts that the Federal Open Market Committee made the right call when it slashed benchmark interest rates by a half percentage point earlier this month.” Last week, the S&P hit a new all-time high, as well as a record close. The Dow Jones Industrial Average and Nasdaq Composite Index also rose last week. After rising earlier in the week, yields on many maturities of U.S. Treasuries moved lower on Friday after inflation news shored up expectations for further Fed rate cuts.

In 2022, the United States Federal Reserve (Fed) began raising interest rates as it battled high rates of inflation. That year prices rose 8 percent, as measured by the Consumer Price Index. In 2023, prices increased more slowly (4.1 percent), but still advanced at a pace that was well above the Fed’s target of two percent. Last month, prices rose 2.5 percent annualized. And last week, the Fed decided it is time to change course. “On Wednesday, policymakers indicated their rate cut would likely be the first of several through the end of next year. The median forecast among members of the Federal Open Market Committee was that the benchmark federal-funds rate will be at 3.4 [percent] by the end of 2025, compared with the current targeted range of 4.75 [percent] to 5 [percent],” reported Elizabeth O’Brien and Shaina Mishkin of Barron’s. “This marks a significant shift. The Fed has moved from a phase when it kept rates high to combat inflation to one where it is lowering them to support the labor market and the broad economy.” As borrowing costs move lower, other interest rates are likely to follow. As a result, consumers, investors, and business owners may have opportunities to: Pay lower interest rates on auto and home loans, Refinance mortgages at lower rates, and Tap into home equity at a lower cost. Major U.S. stock indices rose on Thursday, following the Fed’s rate cut. “The S&P 500 climbed 1.7 [percent]—notching its 39th record in 2024 and extending this year’s surge to about 20 [percent],” reported Rita Nazareth of Bloomberg. “The Fed’s bold start to cutting interest rates and its determination not to fall behind the curve re-ignited hopes the central bank will be able to avoid a recession. Data Thursday showing a slide in jobless claims to the lowest since May signaled the labor market remains healthy despite a slowdown in hiring.”

There was a lot of good news last week! Inflation continued to trend lower. The Consumer Price Index showed that inflation was 2.5 percent year over year (yoy) in August. That’s lower than economists had expected, and a significant decline from July’s 2.9 percent. Food and energy prices have been falling faster than some other prices because the core CPI, which excludes food and energy, showed a 3.2 percent increase over the last 12 months. The biggest price increases were for shelter (+5.2 percent yoy) and automobile insurance (+16.5 percent yoy). Consumers are happier. The University of Michigan’s Consumer Sentiment Survey found that optimism is on the rise. “Year-ahead expectations for personal finances and the economy both improved as well, despite a modest weakening in views of labor markets. Sentiment is now about 40 [percent] above its June 2022 low, though consumers remain guarded as the looming election continues to generate substantial uncertainty,” reported Surveys of Consumers Director Joanne Hsu. “Year-ahead inflation expectations fell for the fourth straight month, coming in at 2.7 [percent].” Household net worth is up in the United States. Last week, the Federal Reserve reported on the financial well-being of households and nonprofit organizations at the end of June 2024. Over the last decade household and nonprofit net worth has risen from $85 trillion (2Q 2014) to $164 trillion (2Q 2024). Vince Golle of Bloomberg reported: “U.S. household wealth reached a fresh record in the second quarter, fueled by a steady rise in the value of real estate and Americans’ stock holdings...The value of real estate held by households climbed about $1.75 trillion, the most in a year, while the value of equity holdings rose about $662 billion.” It’s important to note that not all Americans participate equally as wealth grows. The top 10 percent of households hold 67 percent of all household wealth, while the bottom 50 percent hold just 2.5 percent, according to the St. Louis Federal Reserve. Stocks and bonds had a good week. Last week, major U.S. stock indices moved higher, and U.S. Treasury bonds rallied as yields on all maturities of Treasuries moved lower.