Topic: Market Outlook

  • Stock Market Recap: April 2024

    Month in Review

    • April saw major bond and stock markets decline due to a shifting interest rate outlook, following higher-than-expected inflation data. The S&P 500 had its first 5% or greater drop since October 2023 in April.
    • In the equity market – areas with greater sensitivity to high interest rates lagged, such as small cap stocks (-7.04%, Russell 2000 TR Index). Large cap stocks also declined, with value stocks down -4.27% (Russell 1000 Value TR Index) and growth stocks down -4.24% (Russell 1000 Growth TR Index). Emerging market equities bucked the trend and finished in positive territory (+0.45% MSCI Emerging Market NR Index).
    • As of April 30th, investors were no longer pricing a cut to the Fed Fund rate for 2024, leading major bond markets to 2024 lows (-2.53% in April, Bloomberg Barclays Aggregate Bond TR Index).

    Looking Beyond Narrow Equity Market Leadership

    Large growth companies continue to drive a large portion of the US equity market’s results during the past three and five years – April was no different. The S&P 500 (weighted by the size of the companies in the index) has outperformed the equal-weighted S&P 500 (representing the results of the average company) by an increasingly wide margin over the past 18 to 24 months.

    This has been driven by fast-growing technology companies: technology stocks represent roughly 30% of the market-cap weighted S&P 500, compared to 14% weight in the equal-weighted S&P 500. However, it is important to adopt a longer perspective during these unusual periods. Over the past 15- and 20-year periods, as well as since 2003 – the equal weighted S&P 500 index is ahead or in-line with the market cap weighted S&P 500. On a calendar year basis, the equal-weighted S&P 500 has finished ahead 12 out of 21 years through 2023.

    Although the market has been very top heavy, with the fast-growing technology companies driving the market, markets are cyclical, and longer-time horizons highlight the balance over time.

    Source: Raymond James, FactSet. Data as of 2/29/2024. Since inception date of the equal-weighted is 1/3/2003.

    What’s on Deck for May?

    • Inflation data will be top-of-mind given the recent hot streak in data. Federal Reserve commentary around the data will also be closely watched by investors.
    • First quarter 2024 earnings will wrap up in May. Through the end of April, earnings have finished ahead of expectations for S&P 500 companies that have reported. 
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
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  • Stock Market Recap: May 2024

    Month in Review

    • Markets rebounded after the first 5% drop in April, with all major stock and bond markets finishing May in positive territory.
    • Technology powered large cap growth higher (+5.99%, Russell 1000 Growth TR Index), leading all equity markets higher during the month. Small cap stocks rebounded during the month of May, with the Russell 2000 rising +5.02% (Russell 2000 TR Index). Outside the United States, developed international and emerging market equities both rose in May.
    • Major bond markets also rallied higher in May as investors’ outlook for interest rate cuts stabilized. The Barclays Aggregate Bond TR Index rose +1.70% in May.

    Improving Fundamental Picture

    Equity markets are off to a strong start to 2024, despite surprising persistence of inflation and higher-for-longer interest rates.

    What has been driving markets higher through these headwinds?

    This year has been characterized by improving fundamentals, both with corporate earnings and dividends rising above expectations. First quarter earnings for the S&P 500 have risen nearly twice the estimates from earlier in 2024, and investors have also increased 2025 earnings growth estimates to nearly +14%. Increased investments in technology, along with the supporting infrastructure, appear to have been underestimated by investors heading in 2024. Estimates for growth in 2024 and 2025 have also increased for US small cap stocks and international stocks.

    Sources: Capital Group, FactSet. Earnings growth refers to annual change in earnings per share. As of May 14, 2024.

    Dividends are also tracking ahead of expectations, thanks in part to an increase in dividend payments among technology companies. S&P Dow Jones estimates the S&P 500 dividend to increase by 6% in 2024, compared to a 5% increase in 2023. Over the long-run, stocks will follow fundamentals, and corporate earnings and dividends have been a positive surprise in 2024.

    What’s on Deck for June?

    • No rate cuts are expected, but investors will continue to focus on inflation data and Federal Reserve communication throughout the month.
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill
    May-2024-Market-RecapDownload

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    William Winkeler

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  • Stock Market Recap: June 2024

    Month in Review

    • Mega-cap growth companies rallied sharply higher in June, pushing the S&P 500 higher during the month (+3.59, S&P 500 TR Index). 
    • The rally in mega-cap growth companies opened a wide gap between growth and value in June: large cap growth rose +6.74% (Russell 1000 Growth TR Index), while large cap value fell -0.94% (Russell 1000 Value TR Index).
    • Interest rates fell as data showed a drop in the rate of inflation, which pushed bond markets higher during the month (+0.95%, Barclays US Aggregate Bond TR Index)

    Mega Concentration

    The outlook for corporate earnings has shifted higher- analysts now expect S&P 500 earnings to have grown +9% year-over-year the previous quarter. The increased growth expectations are driven in large part by a belief in the continued growth of investment in technology and alternative intelligence.

    This reacceleration of growth expectations has resulted in the mega-cap companies representing a large portion of the S&P 500’s value: the top 10 companies in the S&P 500 make-up 37% of the index’s value, the largest weight since the index was created. The impact of the increased concentration in the top 10 companies can be seen in the difference between the index (+15.3% YTD, S&P 500 TR Index) and the average stock (+5.1% YTD, S&P 500 Equal Weighted TR Index).

    There are high expectations for future growth in the top 10 companies of the S&P 500: their contribution to earnings over the last 12 months stands at roughly 27%, compared to a weight of 37%. This is a reminder for investors to maintain a diversified approach; markets such as US small cap stocks and international stocks offer lower valuations with an improving fundamental outlook.

    Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. The top 10 S&P 500 companies are based on the 10 largest index constituents at the beginning of each month. As of 5/31/2024, the top 10 companies in the index were MSFT (7.0%), AAPL (6.3%), NVDA (6.1%), AMZN (3.6%), META (2.3%), GOOGL (2.3%), GOOG (1.9%), BRK.B (1.7%), LLY (1.5%), JPM (1.3%), and AVGO (1.3%). The remaining stocks represent the rest of the 492 companies in the S&P 500.

    What’s on Deck for July?

    • Earnings season starts on July 12th; investors expect second quarter earnings to have grown +9% year/year. If earnings growth finishes that high, it would be the strongest quarterly growth rate since 2021.
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill
    May-2024-Market-RecapDownload

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    William Winkeler

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  • Stock Market Recap: July 2024

    Month in Review

    • Major reversals across the equity market, with small cap stocks and value stocks outpacing the large-cap and growth peers sharply in July.
    • Catalyzed by decelerating inflation data, small cap stocks (Russell 2000 TR Index, +10.16%) finished significantly ahead of large cap stocks (S&P 500 TR Index, +1.22% and large cap growth stocks (Russell 1000 Growth TR Index, -1.70%).
    • Additionally, the S&P 500 had its first daily drop greater than 2% in July, the first time in over 350 trading days. This was the longest such streak of low daily volatility in over 15 years.

    Equity Market Rotation

    Last month’s monthly update discussed the record levels of concentration in the S&P 500 – a factor that likely played a role in the significant shift equity markets saw in July.

    After the June inflation (CPI) report was released, investors shifted expectations to a much higher likelihood of a rate cut in September. Generally, small cap stocks have a greater sensitivity to interest rates, given the use of more floating rate debt compared to large cap stocks. This factor, combined with improving earnings fundamentals, resulted in the Russell 2000 outperforming the NASDAQ by over 5% the day of the inflation report. This represents the largest single day outperformance of small cap stocks versus technology stocks in over 40-years (chart below)

    Source: JPMorgan Asset Management, Bloomberg, as of July 21, 2024

    Small caps kept up the momentum of July, along with large cap value stocks (Russell 1000 Value TR Index, +5.11%).

    July represented an important reminder to long-term investors about the benefits of maintaining a diversified approach

    What’s on Deck for August?

    • Earnings season wraps up in August: as of 7/29/2024, 40% of S&P 500 companies have reported earnings, and 76% are beating expectations for the second quarter.
    • The Federal Reserve is expected to use August to signal its intentions around cutting interest rates during its September meeting. The Federal Reserve last hiked in July 2023 and has held rates constant since.
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill
    May-2024-Market-RecapDownload

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    William Winkeler

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  • Stock Market Recap: September 2024

    Month in Review

    • Stock and bond markets continued to rally in September, following the Federal Reserve’s first interest rate cut.
    • Gains expanded beyond market leaders, such as large cap growth and technology stocks, with broader participation within the S&P 500, large cap value, small cap stocks, and international stocks.
    • The S&P 500 Index total return of +22.08% year-to-date as of September 30th represents its best start to a year since 1997, and the best start to a Presidential election year in its history.

    What Happens Next: Market Rotation Following Rate Cuts?

    The Federal Reserve reduced the Federal Funds Rate by 0.50% as expected in September, ending the rate hiking cycle that began in March 2022 and featured over 5% worth of interest rate increases. 

    The market’s outlook largely shifted in early July, when the June inflation report affirmed the outlook for declining inflation, clearing the way for the September rate cut. Since that period, stock and bond market leadership has shifted as the economic and fundamental outlook has changed.

    Since June 30th (after the inflation report and rate cut), market leadership has broadened beyond the Magnificent 7 stocks. The Equal-Weighted S&P 500 Index rose +9.60%, ahead of the market-cap weighted S&P 500 TR Index (+5.89%). Within large cap stocks, large cap value gained +9.43%, ahead of large cap growth’s +3.19% gain. Small cap stocks also participated in broadening, with the Russell 2000 TR Index rising +9.27% during the third quarter. Lastly, core bonds (Barclays US Agg Bond TR Index) rose +5.20%, pulling ahead of money market funds in 2024 as short-term rates begin to decline. The changing environment highlights how dynamic financial markets can be and serves as a reminder of the importance of maintaining a diversified approach to investing.

    Sources: Morningstar, June 30th to September 30th . Average S&P 500 Stock = S&P 500 Equal Weighted TR Index, Large Cap Value = Russell 1000 Value TR Index, Small Cap = Russell 2000 TR Index, Developed International = MSCI EAFE NR Index, S&P 500 = S&P 500 TR Index, Core Bonds = Bloomberg US Agg Bond TR Index, Large Cap Growth = Russell 1000 Growth TR Index.

    What’s on Deck for October?

    • Labor market data will be watched closely as investors look for information ahead of the Federal Reserve’s meetings in November and December.  
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill
    Sept 2024 Market RecapDownload

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    William Winkeler

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  • Stock Market Recap: August 2023

    Month in Review

    • Major stock indices broke a two-month streak of gains, with all major indices finishing down for the month.
    • Growth companies regained favor after two months of value and small cap companies leading the market.
    • Bond prices declined due to rising interest rates.

    Insight on Inflation

    Despite the market volatility, evidence from July’s inflation report suggests progress towards a “soft landing” scenario, where inflation is gradually decreasing, and the economy avoids a recession. In July, headline inflation was at +3.3%, year-over-year, down from its peak of 9.1% in June 2022. Unlike June 2022, supply chains and goods have largely normalized, with wages and services being the key drivers of inflation today.

    Source: BLS, FactSet, J.P. Morgan Asset Management. CPI used is CPI-U and values shown are % change vs. one year ago. Core CPI is defined as CPI excluding food and energy prices. The Personal Consumption Expenditure (PCE) deflator employs an evolving chain-weighted basket of consumer expenditures instead of the fixed-weight basket used in CPI calculations.  Guide to the Markets – U.S. Data are as of August 31, 2023.

    What’s on Deck for September?

    • The August jobs report supplied additional evidence towards a “soft landing” outcome – more people joined the workforce while wage growth slowed, indicating steady but slower economic growth.
    • A “soft landing” could lead to the Federal Reserve not needing to raise interest rates as high as previously predicted, potentially benefiting stocks and bonds.
    • Investors will now pay close attention to the September and November Federal Reserve meetings for clues about future rate hikes or general shifts in policy.

    Download the August 2023 Market Recap below:

    Market-Recap-Aug-2023-1Download
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill

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    William Winkeler

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  • Stock Market Recap: October 2023

    Month in Review

    • Stocks fell during the month of October, marking the third straight monthly decline for the S&P 500 Index.
    • Bond markets also fell again during the month, the fifth straight monthly decline for the asset class.
    • Concerns over US government funding helped keep interest rates higher in October, pressuring stock and bond markets again.
    • US corporate earnings season is also in full swing, with over 50% of the S&P 500 having reported by the end of the month. Companies have thus far reported positive earnings growth with mixed outlooks.

    Last Rate Hike? Now What?

    The Federal Reserve held its November committee meeting, where they kept interest rates unchanged. Following the press conference, investors are now expecting interest rates to be unchanged again in December (only a 15% probability of a December rate hike as of 11/2/2023).  If the Federal Reserve is finished increasing interest rates this cycle, what does that mean for the stock market? Going back to 1929, there are no clear trends, the range of outcomes following the last hike is very wide historically. While various talking heads remain hyper-focused on short-term events such as this, it is more important than ever that investors maintain their focus on long-term fundamentals.  

    What’s on Deck for November?

    • The autoworkers strike appears to be nearing resolution, while a potential government shutdown remains a possibility ahead of the November 17th deadline.
    • Corporate earnings season is nearly two-thirds complete, with companies reporting earnings ahead of estimates on average, and clocking positive growth this quarter. Investors will focus on forward guidance from companies as the season wraps-up.
    • The next Federal Reserve meeting is not until December 13th, so in the interim investors will continue to look for communications and sign-posts for confirmation the Federal Reserve is done increasing interest rates. The Federal Reserve did confirm their on-going effort to reverse their quantitative easing (QE) program, which is expected to keep interest rates elevated.

    Download the October 2023 Market Recap below:

    Market-Recap-Oct-2023Download
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill

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    William Winkeler

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  • Stock Market Recap: November 2023

    Month in Review

    • Stocks rose sharply in November, breaking a three-month losing streak. Gains were broad based across major markets.
    • Bond markets also broke a five-month losing streak, posting strong results as short- and long-term interest rates fell significantly during November.
    • Multiple data points illustrated that inflation is in continued decline, raising investor confidence that the Federal Reserve is done hiking and turning its focus to potential rate cuts in 2024. 

    A November to Remember!

    November was a month to remember for investors: The S&P 500 posted its strongest November since 1980 (rising roughly 9%) and the Barclays Aggregate Bond Index had its best month since May 1985 (rising roughly 4.5%).

    What were the catalysts for such a sharp reversal?

    Investor sentiment had become overly negative – a three-month losing streak for stocks and a 5-month losing streak for bonds. This set-up was followed by unexpected positive developments on the fight against inflation. Multiple readings during November showed inflation rising by less than expectations. Federal Reserve officials also affirmed progress towards normalizing inflation, the decline can be seen in the exhibit below. The positive developments on inflation drove interest rates lower, sending stock and bond prices higher, as investors now shift their attention away from rate hikes to rate cuts.  

    Source: BLS, FactSet, J.P. Morgan Asset Management. CPI used is CPI-U and values shown are % change vs. one year ago. Core CPI is defined as CPI excluding food and energy prices. The Personal Consumption Expenditure (PCE) deflator employs an evolving chain-weighted basket of consumer expenditures instead of the fixed-weight basket used in CPI calculations. Guide to the Markets – U.S. Data are as of November 30, 2023.

    What’s on Deck for December?

    • Earnings season is wrapped up and government shutdown issues have been pushed out until January 19th and February 2nd of 2024.
    • The Federal Reserve meeting on December 13th will be watched closely for comments on the timing and magnitude of the first rate cut and the on-going shrinking of the Fed’s balance sheet. At time of writing, futures markets are implying a 50% chance of a 25bps rate cut during the March 20th, 2024 meeting.
    • As we enter 2024, the US Presidential election will once again be a focus. Despite a significant amount of noise, it is important to remember that the S&P 500 has only had negative returns in election years two of the last 20 election years (2000, 2008).

    Download the November 2023 Market Recap below:

    Nov-2023-Market-RecapDownload
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill

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    William Winkeler

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  • Stock Market Recap: September 2023

    Month in Review

    • Stocks had their worst month since December 2022 and bonds fell for the fourth straight month. 
    • Rising Treasury yields were the primary catalyst – the 10-year Treasury yield hit a 16-year high during September.
    • Restrengthening inflation data and the prospect of additional interest rate hikes by the Federal Reserve are the main catalysts for the pressures.

    Bond Yields Return to Average

    Despite nearly a decade of low interest rates, the 10-year Treasury yield typically averages 3% to 5% yield, going back to the late 1800’s. For the first time since 2007, the 10-year Treasury rose to 4.5%, comfortably returning to long-term averages. Recent inflation data was stronger than expected, contributing to the increase in yield, along with the prospect of additional rate hikes from the Federal Reserve. The increase in yields reduces the value of bond investments in the short-term, and higher yields present a more attractive alternative to stocks – two reasons stocks and bonds struggled in August and September.

    What’s on Deck for October?

    • Outside of fundamentals, there are headwinds from the on-going autoworkers’ strike, and a potential shutdown of the US government. Both events historically have not had lasting impacts on the economy and markets.
    • The surprisingly strong labor market was the primary reason the predicted 2023 recession did not happen – investors will be watching job creation and unemployment claims data closely for any softening.
    • An additional interest rate hike in November or December is very much up in the air. Inflation data had strengthened somewhat, along with energy prices increasing sharply since June. It is unclear if this is enough for the Federal Reserve to hike one more time.

    Download the September 2023 Market Recap below:

    Market-Recap-Sept-2023Download
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill

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    William Winkeler

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  • Stock Market Recap: August 2024

    Month in Review

    • Broad-based gains during the month of August, with US large cap stocks finishing the month up +2.43% (S&P 500 TR Index). In the US, large cap value (+2.68%, Russell 1000 Value TR Index) finished ahead of large cap growth (2.08%, Russell 1000 Growth TR Index) for the second consecutive month.
    • US small cap stocks took a breather after a strong July, finishing August down -1.49% (Russell 2000 TR Index). Outside the US, developed international equities benefitted from a weakening US dollar, rising +3.25% in August (MSCI EAFE NR USD).
    • Bond markets rose for the fourth straight month in August, with the Barclays US Agg Bond TR Index finishing the month +1.44%.

    What Happens Next: Soft or Hard Landing?

    The Federal Reserve is poised to cut interest rates in September, the first interest rate cut since they began increasing interest rates in March 2022. Investors are now pondering, “what happens next?”: a “soft” or “hard” landing for the economy.

    While not officially defined, a soft landing would be a continued decline in inflation and interest rates, without growth slowing down enough to enter a recession. Hard landing would be the opposite – a continued increase in unemployment and a slowdown in economic growth, resulting in a recession. Soft landings are historically less common, with the most recent (and classic case) being the 1994-1995 period.

    Inflation has fallen closer to the Federal Reserve’s target rate, while unemployment has also begun to increase, prompting the likely rate cut in September. However, other signs indicate continued strength in the economy: for example, estimates for GDP growth this quarter stand at +1.5%. With no clear forecasts for a soft or hard landing, investors have priced in three to four rate cuts by the end of 2024, indicating expectations that the Federal Reserve will start and continue rate cuts in September.

    Sources: Capital Group, Bureau of Economic Analysis, FactSet. Figures for Q1:20, Q2:20, and Q3:20 are –5.5%, –31.6%, and 31.0% respectively, and are cut off by the y-axis given the extreme fluctuations associated with the COVID-19 pandemic. Estimate for Q3:24 is based on the mean consensus estimate from FactSet. As of August 22, 2024.

    What’s on Deck for September?

    • With  earnings season wrapped up in August, investors will be watching the Federal Reserve’s FOMC meeting closely for color around a potential rate cut. 
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill
    August 2024 Market RecapDownload

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    William Winkeler

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