Coming off a year-long bear market in 2022, US indices have been on an incredible 20+ month run. Leading the way is the tech-heavy Nasdaq, up 83%(!!) since January 1, 2023. The S&P 500 and Dow Jones are up 48% and 27%, respectively.
When incredible runs like this occur, investors often start to ponder some form of the question: “How much longer can this go on?” The truth is, we won’t know until it is over. The best we can do now is look at what is propelling the market forward and try to decipher the likelihood of it continuing.
Right now, it is hard to argue that this trend will reverse anytime soon, given the current economic backdrop. Economists, such as Mark Zandi, Chief Economist at Moody's Analytics, haven’t held back on expressing how strong the US economy is currently:
“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% over the past year. Unemployment is low at near 4%, consistent with full employment. Inflation is fast closing in on the Fed’s 2% 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.” - @MarkZandi on Twitter
The GDP revisions Zandi mentions were part of the annual revisions released by the Bureau of Economic Analysis (BEA), the government agency that constructs the GDP reports. Among their revisions for 2023 numbers were:
- GDP growth of 2.9%, adjusted up from the previously estimated 2.5%
- Corporate profits increase of 8.9%
- Consumer saving rate revised up to 4.7%
- Reuters – US Economic Growth, Corporate Profits Revised Higher in 2023
These strong numbers came in a year with 4% inflation and short-term interest rates above 5%. With inflation seemingly controlled and the Federal Reserve lowering interest rates, the setup for stocks is encouraging.
US Port Worker Strike – 45,000 port workers across the Atlantic and Gulf coasts are currently on strike due to disputes over wage increases. Roughly 43% of all US imports flow through these now-shuttered ports. CNBC The economic impact of these strikes will depend on the duration of the shutdown. Economists have warned that inflation could reignite as supply chains are constrained and goods are unable to reach consumers. CNBC Many US corporations anticipated this strike and had already begun stocking up on their inventory and rerouting freight to ports on the West Coast, a move many hope will lessen the hit to US consumers.
New Life in Chinese Stocks? – Last week, China’s central bank announced a massive economic stimulus plan in hopes of bringing the country out of its deflationary, lower-growth environment. The plan includes a 0.50% interest rate cut, a reduction in cash reserve requirements for Chinese banks, interest rate cuts on existing mortgages, and an infusion of $71 billion for brokers and fund managers to purchase China-based investments. Janus Henderson While many analysts have questioned these measures and believe these initiatives won’t solve China’s economic issues, investors have had a very positive reaction to the news.
Chinese stocks, represented in blue, have rallied nearly 30% since the stimulus was announced last Tuesday. This brings their growth up to over 46% since the start of 2024 vs. around 19% for the US market (in purple).
Zooming out, however, you can see just how bad things have been for investors in Chinese stocks. Since January 1, 2020, investors in the S&P 500 have enjoyed a gain of 76%. Over that same period, Chinese stocks are negative, even after this recent spike in performance.
Financial Planning/Investment Strategy Corner:
Politics and Investing Don’t Mix – I have written about the upcoming Presidential election a couple of times already this year RSWA Financial Advisor Insights – Election Year’s Impact on Markets and RSWA Financial Advisor Insights – US Market’s Response to Political Uncertainty, but I figured I would really drive the point home with one more edition.
Presidential election results don’t cause market crashes. Below are returns of the S&P 500 from November 1 to December 31 in the past eight election years. Five out of the last eight election years have seen the market finish the year on a positive two-month run. On the two occasions that had the worst performance to finish the year, 2000 and 2008, the US economy was already in the midst of a recession. That is not the case in 2024.
2020: +14.87%
2016: +6.02%
2012: -0.10%
2008: -6.76%
2004: +7.20%
2000: -7.10%
1996: +5.25%
1992: +4.07%
Presidential election results are not indicative of sector performance. More and more, I have seen articles along the lines of “How investors can position their portfolios ahead of the election.” Placing bets on stocks or sectors that will outperform solely based on who wins an election is a hard game to win.
Ahead of Trump’s presidency, many predicted his friendly policies toward big banks and energy companies would propel those companies and sectors forward. The Financials sector of the S&P 500 lagged the overall index by about 6% per year, while the energy sector experienced an annual return of -8% over the 4-year period.
For the Biden presidency, his administration’s tougher stance on big tech and promotion of green energy initiatives was going to be a major headwind for those industries. You guessed it. Traditional energy has led all sectors, more than doubling the performance of the overall index, and Tech is in second place, averaging about 7% per year more than the overall index. Source: Richard Bernstein Advisors – Fade the Election
Quick Hits:
- Americans like cheese. Like a lot. Sherwood News - America Is Eating, and Exporting, More Cheese Than Ever Before
- College athletes are finally getting paid, and predictably, bad deals are being made, and promises aren’t being kept. Bloomberg - College Football Players Learn an Ugly Truth About Getting Paid
- Most notably, UNLV QB Matt Sluka was promised $100,000 to play for the school. After only seeing $3,000, he is now leaving the program. The Athletic - Inside UNLV and Matt Sluka’s NIL Dispute and What It Could Mean For College Football
- 38 states have legalized sports betting. Here is where the states are putting this new revenue to work. I am no longer losing money betting on my Indianapolis Colts but merely helping to fund K-12 education. 😊 Bloomberg – Where All the Sports Betting Money Actually Goes
- Stop hoarding your credit card rewards. WSJ - The Buying Power of Your Credit-Card Points Is Tanking
Quote: “Doing nothing often leads to the very best of something.” – Winnie the Pooh
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