Monthly Market and Economic Update - October 2024

In October, the S&P 500 Index was down 0.91%, while the Bloomberg Barclays US Aggregate Bond Index was down 1.34% and the Bloomberg Barclays Municipal Bond Index was up 0.99%.
The stock and bond market fell slightly during the month as the markets became concerned with the possibility that the economy had more momentum than the Fed anticipated when they lowered the Fed Funds rate at the end of September.
As the month closed, inflation and the GDP numbers showed that the concern of a too-hot economy was likely overblown.
The Federal Reserve is on track to lower the Fed Funds rate by a quarter point in November and December.

After applauding the Fed’s interest rate action by bringing the 10-year Treasury yield down to 3.63%, the bond market was spooked by data that appeared to show the economy growing faster than expected. This made the market fear the return of inflation and tighter labor markets. However, later in the month, job data reflected a continued normalization of job openings and wage growth. The initial report of GDP growth for 3rd quarter was a healthy 2.8% but was slower than expected which also allowed the markets a bit of respite.
Bonds have been behaving much better this year for investors. As interest rates fall, bond values rise. Yields had fallen at least a full percentage point across all maturities of the yield curve. Even with a slight uptick in rates, investors are enjoying much higher current yields than they have in several years. The combination of higher current interest rates and rising values due to falling interest rates may result in a rather ordinary but potentially positive remainder of the year for bonds. Given the volatility in bond values over the past few years, ordinary is likely very welcome. The soft landing for the economy continues to appear more likely than other potential scenarios. 2024 started with strong results for the key indicators for economic growth – jobs growth, consumer spending, and industrial production. Despite numerous recession forecasts in 2022, 2023, and now going into 2024, the actual economy continues to grow.

Based on market/election history since 1926, the election outcome that has performed best is when there is a divided political scenario. Regardless of whether the President is a Democrat or Republican, if congress is split in terms of who controls the Senate and the House of Representatives, the market has performed than if there is one party in control. There is a similar positive outcome when the President and Congress represent different parties. In other words, the stock market prefers gridlock. It should be noted, there are positive returns even when one party controls the executive and legislative branches, though not as strong as the gridlock scenarios.
The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve now entering the next phase of lower interest rates during the final part of 2024 and into 2025, stock market leadership is broadening out to include stocks that have been overlooked and undervalued. Those opportunities can be found in both US and international stocks. In the event of a near term correction, investors should continue to focus on the longer-term path of the stock market and the economy and take advantage by rebalancing to their appropriate risk profile.

The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors. Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.

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