CWG Investment Committee: Surprise in September
September is historically the most frequent down month in any given investment year, but not this one. The S&P 500 gained 2.0%, the Nasdaq was up 2.7%, and the Dow climbed 1.9%. Thus, the bulls continue to run on Wall St.
More encouraging is that this market rally has finally broadened out. The “Magnificent 7” stocks had previously been the dramatic leaders while most stocks underperformed. That changed in Q2 2024 as a healthy sector rotation occurred, sending the S&P 500 Equal Weight Index up 9.6%, the small cap Russell 2000 up 9.3%, and the Russell Microcap up 6.9%.
After another shaky start to the month, Federal Reserve fever prevailed as we got a strong signal from Chair Powell that the period of high short-term rates is coming to an end as inflation approaches the 2% target while the economy continues to grow.
Unemployment ticked down to 4.1% from 4.3%, but most have forgotten that “old school full employment was considered 5%” for decades before innovative monetary policy, such as quantitative easing, was invented in 2008.
The 10-Year US Treasury yields 4.0% today, or 0.29 higher than at the beginning of September. Yield rose slightly in September then marched higher last week after a blowout jobs report was released.
Stocks have shrugged off numerous concerns of late.
Geopolitical risks continue to rise as both wars in Ukraine and the Middle East escalate.
Political uncertainty ahead of the November 5th election could provide a high dose of volatility.
Valuations are rich with the S&P 500 trading at 21.5x forward earnings, according to FactSet. This P/E ratio is above the 5-year average 19.5x and the 10-year average 18.0x.
Stocks march higher, nonetheless, as the bulls remain in charge.
A combination of improvement in earnings, a somewhat weaker U.S. dollar, and lower interest rates along the whole yield curve has driven the DJIA and S&P 500 to new highs while the Nasdaq and Russell 2000 are yet to break through their top marks.
October will provide more earnings reports and the last month of what seems to be relentless campaigning by both parties.
Stocks historically go even higher into year-end after a Presidential election. However, given the strong returns over the first three quarters and the aforementioned concerns, we would not be surprised to see a healthy pullback before then.
Stout returns from stocks for two years running may set us up for somewhat more staid returns in 2025.