Market Updates

According to The Conference Board, a reading below 80 generally indicates a potential recession is ahead, based on consumers’ short-term outlook for income, business, and labor market conditions. Currently, the data is healthy distance from signaling recession.

A senior economist of global indicators at The Conference Board had this to say about February’s survey: “References to inflation and prices in general continue to rank high in write-in responses. Most notably, comments on the current administration and its policies dominated the responses.”

Without clarity on policies that will affect jobs and the cost of goods and services, consumer concern likely will stay high, and consumer activity may downshift.

Because consumers make up the largest component of the US economy – consumer spending accounts for roughly two-thirds of Gross Domestic Product, or GDP – financial market participants smell trouble, which has pressured stocks.

For the month of February, large-company foreign stocks (MSCI EAFE Index) came out on top and gained 3.1%. US investment-grade bond returns (Bloomberg Aggregate Bond Index) also were appealing, with a gain of 2.2%.

Large-company US stock returns, measured by the S&P 500 Index, declined by 1% in February. Technology shares, measured by the Nasdaq 100 Index fell by 2.7%, and Small-Company US Stocks fell by 4.8% (CRSP US Small-Cap Index).

Here’s a snapshot of February market performance (note that returns from the first week of March are excluded from the chart below):

Note: Foreign Stocks: MSCI EAFE International Index; US Small Co: CRSP US Small Cap Index; US Large Co = S&P 500 Index; US Tech Stocks: Nasdaq 100 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

Stock and bond market performance for the first month of 2025 was pleasing.

Foreign stocks gained 4.8%, US small company stocks climbed 3.9%, US large company stocks went up 2.7%, and technology shares rose by 2.1%. Bonds were in the black, too: high-quality, intermediate-term debt returned 0.5%.

However, there was turbulence beneath the surface of the stock market, mainly due to developments in the technology sector.

One part of the Artificial Intelligence environment is Large Language Models (LLMs). These AI-powered systems are trained on massive amounts of text data, which facilitate human-like text responses to a wide range of prompts and questions.

ChatGPT is a widely recognized and utilized LLM. It was developed by OpenAI, of which Microsoft holds a minority ownership stake.

All the big tech companies, including Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft and Tesla are spending huge amounts of money investing in LLMs and anticipating big future payoffs on this invested capital.

In addition to these well-recognized firms, a constellation of lesser-known US companies (big and small) that supply software, equipment, storage, and energy to support AI initiatives have been riding the AI wave higher.

In mid-January, a new chatbot called DeepSeek caught the attention of tech investors for several reasons: it was developed cheaply; it runs on less-expensive equipment; it is fast; and it is good. Also, its maker is a small Chinese company, not a Silicon Valley behemoth.

Whether or not DeepSeek becomes a true competitive threat to US technology companies is yet to be seen.

But it was a shot fired across the bow of US technology companies, and some US tech stocks swooned for a few days at the end of the month.

Why does this matter for US investors? The main reason is that the US stock market has become more dependent on ever-higher profits, and ever-higher stock prices, from big tech.

The information technology sector has grown from about a quarter of the US stock market a few years ago to more than one-third today.

When the future profitability of US tech companies is called into question, and when tech stocks slip, it’s harder now for stocks in other sectors to pick up the slack.

This also means that even US investors who hold well-diversified portfolios are likely to feel pain if a correction in tech stocks materializes.

In January, tech turbulence was contained to a few days, and stocks generally finished higher at the end of the month.

However, the DeepSeek tremor was a reminder that troubles for technology companies, if sustained, would probably have far reaching effects for all investors.

Regarding the safer side of investing, the “big news” in the bond market for January was: no news.

The Federal Reserve held their first FOMC meeting of 2025, where interest rate policy is reviewed and discussed, and… nothing happened.

Market participants are now expecting the Fed to stand pat for a while, and to keep the target for short-term interest rates steady for the next six months. This contrasts with the “rate cuts” that occurred during the second half of 2024.

Why is no news from the Fed big news?

It likely means savers will continue to enjoy a satisfactory rate of return on their guaranteed money that is kept in high-yield bank savings accounts and bank CDs.

With the lower bound of the Fed Funds target rate at 4.25%, this probably means short-term CDs are likely to provide a 4%+ annual percentage yield (APR) during the first half of 2025.

It also means that the Fed remains vigilant in their fight against inflation.

If the Fed is successful in convincing market participants that inflation is indeed under control, it should translate to a hospitable environment for investors who own intermediate- and longer-term bonds.

With 10-Year Treasuries yielding about 4.5%, it’s reasonable to expect 5%-plus returns for 2025 from bond allocations in investment portfolios, if inflation, and inflation expectations, remain contained in 2025.

But a trade war could be problematic for financial markets.

An emerging risk, especially to the bond market, is a new tariff regime. On February 1, President Trump announced new tariffs on a range of goods coming into the US from Canada, Mexico, and China.

Trade is huge, diverse, and complex, so the ultimate impact of higher duties isn’t easy to know. A lot depends on size, width, and length: how high tariffs go, how broadly they’re applied, and how long they last.

If tariffs come and go quickly, the inflationary impact will be minimal. But a new regime with high tariffs applied to many trade partners that lasts for an extended period could usher in higher inflation.

If expectations about future inflation go up substantially, this will likely mean higher bond yields, with lower prices and lower returns for bonds – especially for intermediate and longer-term bonds and bond funds.

And if history does rhyme (to paraphrase Mark Twain) then resurgent inflation may well prove to be a challenge for stocks, too.

Performance for the month of January is pictured below:

Note: Foreign Stocks: MSCI EAFE International Index; US Small Co: CRSP US Small Cap Index; US Large Co = S&P 500 Index; US Tech Stocks: Nasdaq 100 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

In most instances, from Christmas through year end, investors are treated to a “Santa Claus rally”, where stock prices rise. But 2024 had an atypical end, with stocks falling flat.

The closing drop last year marks only the 12th time the benchmark S&P 500 index fell by more than 1% over that span since 1952.

So, does a “Santa Slump” mean poor returns going forward? Not quite, according to Bespoke Investment Group.

The research outfit found that, in the twelve months following a year-end decline of more than 1%, stocks tended to do better.

In fact, Bespoke found that large company stocks’ median performance after those eleven down years has seen a roughly 12% gain.

For 2024 as a whole, it was another banner performance for U.S. stocks.

In 2024, the S&P 500 index of large-company stocks rose nearly 25% and hit 57 new all-time highs along the way – the most since 1928. This stellar performance follows a 26% return for US stocks in 2023.

Once again, we have the technology sector, and the excitement around Artificial Intelligence (AI) to thank for these more-than-satisfactory gains. The seven largest tech companies, often referred to as the “Magnificent 7”, rallied 48% in 2024.

Stock gains were slightly less concentrated last year. The “Mag 7” contributed 55% of the return of large-company stocks, compared to 63% in 2023.

Outside of the US, stock returns were positive, but much less impressive. The MSCI EAFE (Europe, Australasia, and the Far East) index of foreign stocks rose by a pedestrian 3.5%.

One reason why foreign stock returns trailed far behind US stocks is that the US dollar strengthened by about 7% compared to other major foreign currencies.

Dollar strength acts as a drag on foreign stock returns, when those returns are measured in US dollars.

Another reason is that the Mag 7 is unique to the US.

While successful technology firms do exist outside US borders, no other country or region has an equivalent group of dominant, AI-focused companies like Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla.

Bond returns also lagged far behind those of US stocks. Through September, intermediate bonds registered pretty good performance, returning about 5%.

But as the odds of a Republican victory at the polls went up in the fall, so too did interest rates (the concern being resurgent inflation), which had a negative effect on bond prices.

By the end of 2024, intermediate-term bonds, measured by the benchmark Bloomberg US Aggregate Bond index, returned 1.3%.

Short-term bond funds, where prices are much less influenced by changes in interest rates, did better, posting returns ranging from 4 – 5%.

Here’s a snapshot of quarterly US stock and bond performance in 2024:

Note: US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

Few were nonplussed by the outcome of the Federal Reserve’s meeting on November 7: a 0.25% cut in short-term interest rates.

The Fed has been consistently telegraphing a message that it believes there is room for further interest rate reductions.

The top of the target range for the Federal Funds rate, which influences how other short-term interest rates are set, is now 4.75%, down from a recent peak of 5.5%.

Somewhat surprising was how Americans voted in the November 5 presidential election.

Opinion polls had been forecasting a statistical dead heat, but the margin of victory in the popular vote was wider than expected: 1.6 percentage points, or about 2.5 million votes, in favor of Donald Trump.

More surprising was the gap in electoral votes (312 to 226), and that both houses of Congress will be under Republican control in January.

The biggest surprise for investors in November, though, was the extent to which the US stock market rallied.

The S&P 500 and the Dow Jones Industrial Average indices delivered their biggest monthly percentage gains of 2024 in November.

Stocks have pushed higher on expectations that proposed tax cuts and deregulation will further boost corporate profits.

And stocks have largely ignored the potential risks, such as higher inflation, that may weigh on the financial markets if pledges to impose tariffs on US trading partners come to pass.

For the month of November, US large company stocks gained 6% and US small company stocks did better still, registering an increase of 10.5%.

US investment-grade bonds returned 1.1%. Foreign stocks, where returns are measured in US dollars for US investors, struggled as the US dollar moved higher, and declined by 0.3%.

Year-to-date, US large company stocks have gained nearly 28%. US small company stocks are up by 23%. Foreign stocks have risen by about 6.5%, and US investment-grade bonds have returned 3%.

Here’s a snapshot of stock and bond performance for November:

US Small Co Stocks: CRSP US Small Cap Index; US Large Co Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index; Foreign Stocks = MSCI EAFE Index

-RK

With the approach of the US Presidential election, some investors had been fearing a “Shocktober” for financial markets, however, October proved to be more like “Floptober”.

Stock markets were generally in the black for the month, but on Halloween equity indices flopped to red. For the month as a whole US large company stocks declined by 0.9% and small company stocks fell by 0.7%.

Quarterly earnings reports released by a few large US technology companies last week underwhelmed Wall Street analysts. Concerns about the possibility of diminished tech profits in the future spooked stocks and seemed to be one of the factors behind the fall in stock prices.

Foreign stocks were negatively impacted by a strengthening US dollar and dropped by 5.3% in October.

Despite recent weakness, though, stocks have performed very well so far this year. With two months to go in 2024, US large company stocks have returned nearly 21%, small company stocks have risen 11.5%, and foreign stocks are up by 7%.

The past month delivered more tricks than treats for bond investors, too. Intermediate- and long-term interest rates rose by about a half percentage point which translated to negative performance for bond fund investors.

The bond market situation can be confusing for some investors, especially when longer-term interest rates go up at a time when the Federal Reserve has begun to reduce its target for short-term interest rates.

Concerns about persistently wide Federal budget deficits and increasing US government debt, and the possibility of both conditions worsening under either future Republican or Democrat administrations, were factors behind rising intermediate and long-term interest rates, and poor bond performance, in October.

The performance picture is murkier for bonds going forward. Satisfactory returns from short-term bonds seem likely, because interest rate fluctuations have a lesser impact on bonds maturing on the sooner side (and bond funds which hold these securities).

However, for bonds maturing farther out in time (and bond funds that hold these securities), rising interest rates are a drag on near-term performance.

The benchmark intermediate-term US bond index fell by 2.5% in October. Year-to-date, intermediate-term bonds have registered a positive return of 1.5%.

For short-term bonds, Morningstar’s bond benchmark that tracks performance for US bonds with less than a year to maturity had a positive 0.25% return in October, and is up by nearly 5% year-to-date.

Despite softer financial markets in October, new data related to the US economy remained upbeat.

Gross Domestic Product (GDP), which quantifies the total value of all goods and services produced within a country’s borders, and therefore acts as a kind of quarterly economic “check-up”, continues to show that the US economy is in good health.

The Commerce Department reported last week that GDP rose by a 2.8% annual rate in three months ending September 30, after adjusting for inflation. That came close to the 3% growth rate in the second quarter.

While output in some areas, such as the housing market, has been lackluster, overall the US economy remains buoyant, supported by wages that continue to rise and consumers whom are willing to spend.

Here’s a snapshot of stock and bond performance for October:

US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index; Foreign Stocks = MSCI EAFE Index

-RK

As we head into the last three months of 2024, the US Presidential election is a major source of uncertainty, and elevated geopolitical tensions are a cause for serious concern.

However, the rally in stock prices continued in the third quarter, and bonds showed a measure of resiliency, too.

A main mover of financial asset prices has been the anticipation of short-term interest rate reductions by the US Federal Reserve. In mid-September the Fed took action and lowered its target rate by 0.5% to a range of 4.75% to 5%.

The US economy, which has exhibited better-than-expected growth, has underpinned the stock rally. And bonds have done better because inflation has come to heel.

For the month of September, US large-company stocks rose by 2.1%; small-company stocks gained 1.9%, foreign stocks climbed by 0.8%, and bonds returned 1.3%.

The moves were more pronounced for the three-month period ending September 30: US large-company stocks rose by 5.8%; small-company stocks gained 9.1%, foreign stocks climbed by 6.8%, and bonds returned 5.3%.

Here’s a snapshot of stock and bond performance for the last six quarters:

US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

The thrill of sliding down a water slide happens at the beginning. Initially, there is a sharp, breathtaking decline, followed by a level area that is quick and smooth, after which the rider is deposited into a refreshing pool.

While less than a perfect analogy for financial market activity in August, the water slide comes close.

Stocks fell at a breathtaking clip early in the month, declining by 6% in the first three trading days (see our August Mid-Month Update for more details).

But the fast ride down leveled out, and ultimately stock prices moved back up. For stock investors who maintained their investment strategy, August results were pleasing.

US Large Company stocks rose by 2.3%, and foreign stocks increased by 3.3%. Technology stocks did less well, climbing by 1%.

US small-company stocks struggled, dropping by 1.7%, following a stellar performance in July. Stocks generally have now risen for four straight months, with the last monthly decline occurring in April.

Thus far in 2024, financial market returns have been constructive: Technology, 20.5%; US Large Company, 19.3%; Foreign, 12.1%; US Small Company 10.2%. Bonds returned 1.5% in August and are up 3.2% year-to-date.

Positive stock market returns likely are one factor influencing consumer confidence, as recent data show an upward shift in sentiment.

The Conference Board, a New York-based research organization, said on Tuesday that its consumer confidence index rose in August from July, matching its highest level since February.

Other consumer confidence polls, such as the University of Michigan’s consumer sentiment gauge, and a recent Wall Street Journal survey, point in the same direction.

Below is a snapshot of financial market performance for August.

-RK

US Small Co = Russell 2000 Index; Foreign Stocks = MSCI EAFE Index; US Bonds = Bloomberg US Aggregate Bond Index; US Large Co = S&P 500 Index; Tech Stocks = Russell 1000 Technology Index

A rip current is a strong, narrow jet of water that moves away from the coastline.

If you’re an ocean swimmer caught in one, the best strategy is not to fight it, but relax, go with the flow, and try to swim parallel to the beach. Eventually, you’ll move out of the rip current and be able to swim back to shore.

In mid-July, the first rip current began to move through the financial markets.

Tech stocks, which had been leading the broader stock market higher throughout 2024, stumbled. But small company stocks, which have lagged performance-wise for years, soared.

Below is a snapshot of financial market performance for July.

US Small Co = Russell 2000 Index; Foreign Stocks = MSCI EAFE Index; US Bonds = Bloomberg US Aggregate Bond Index; US Large Co = S&P 500 Index; Tech Stocks = Russell 1000 Technology Index

While political developments grabbed lots of headlines—including an assassination attempt of a former US President and the announcement that the sitting US President wouldn’t seek a second term—these weren’t events that had a large impact on financial markets.

The July outperformance of small company stocks appears to be linked to expectations for short-term interest rates.

Small companies rely mainly on banks for financing, whereas big companies have more borrowing options, including issuing bonds. Interest costs associated with bank debt float up or down with short-term interest rates.

Because of this reliance on bank loans, the thinking goes that small companies will get a financial boost as short-term interest rates fall. Many market participants believe that the Federal Reserve will reduce interest rates sooner rather than later, so demand for small company shares increased markedly in July.

Financial market prognosticators are referring to this preference to favor small company stocks over large company stocks a “rotation trade”. For investors with well-balanced portfolios, this phenomenon with the wonky name may be interesting to observe but needn’t be viewed as a call to action.

A second more consequential rip current also began moving through the financial markets in July.

This rip current has to do with the anticipation of an economic slowdown, and the feeling that the Federal Reserve has waited too long to bring down its target for short-term interest rates to provide financial relief to business and consumer borrowers.

The Employment Situation Report, released by the US Bureau of Labor Statistics on Friday, August 2, seemed to validate this concern, because it showed less robust US jobs growth and a higher unemployment rate.

From the recent peak on July 16 through August 2, US large company stocks have declined by 5.5%, and technology shares approached correction territory, having fallen by 9.5%.

Financial market choppiness, which we experienced in the second half of July, and which accelerated in early August, likely will be with us for the next few months.

August, in particular, has historically been one of the more volatile months for stocks.

Also, the US election cycle has moved into high gear, with more to come regarding policies (potentially good or bad) that might affect the economy and financial markets.

However, the US economy continues to be in a good place:

• companies are still hiring
• businesses are generally holding onto employees
• corporate profits are rising
• inflation is decelerating
• the Federal Reserve is likely to bring down short-term interest rates soon

These economic positives should help investors ride through the financial market rip currents.

The chart below, published by the Hartford Funds, provides some perspective on what has happened to stocks in the past when the Federal Reserve (the Fed) reduces interest rates.

Hartford Funds identifies twenty-two periods of Federal Reserve interest rate reductions (when the Fed cuts rates) since 1929. In sixteen of these instances (72% of the time) stocks rose during the year of the Fed cuts.

Most pertinent to today’s situation: in all six instances when interest rate reductions occurred during times of economic expansion (grey bars in the chart above), stocks have finished higher by year end.

And the average annual gain during periods of economic expansion paired with Federal Reserve interest rate reductions has been 11%.

-RK

As we move into the second half of 2024, the US economic engine is chugging along.

Strong growth in employment and wages has boosted disposable income for workers. Household net worth continues to climb, pushed up by stock market and house price gains. And consumers appear poised to enjoy summer with a sunny, ready-to-spend mood.

According to JP Morgan chief strategist David Kelly: “consumer spending will likely keep growing, although more slowly, in the months and quarters ahead, suggesting that it would take a significant shock elsewhere to tip the US economy into a recession.”

With sunny skies and no recession in sight, the investment environment for stocks has been hot.

The S&P 500 index of large company US stocks returned 15% in the first half of the year, and strong performance by a handful of big tech companies contributed about two-thirds of the index’s return.

So far in 2024, the S&P 500 Index has made a record high 33 times. The Nasdaq 100 index, which has a large weighting to technology stocks, has made a record high 23 times.

Foreign stock market returns have been less ebullient but still positive. The MSCI’s Europe, Australasia, and the Far East (EAFE) Index has gained 5.8% year-to-date through the end of June.

Here’s a chart from Bloomberg that puts the current stock market rally into historical perspective.

The S&P 500 has posted an 85% advance since 2019 (red line), even despite some challenging stretches, like “Pandemic” 2020 and “Inflation Scare” 2022.

Compare this to the 238% rally during the last five years of the Roaring Twenties (black line) in the previous century, and the 220% climb of the 1990s Internet Bubble (green line).

When viewed from an historical perspective, the current bull market appears to be more run-of-the-mill than exceptional, and less likely to be cited as an example of irrational exuberance that led to an inevitable bursting of a bubble.

The bond market has been a far chillier place to invest so far this year. Short-term bond returns have been in the range of 1-3%.

However, doubts and worries persist about the direction of intermediate-term interest rates. Most recently, market participants are raising concerns about the Federal government’s budget deficit, inflation, and the outcome of the 2024 Presidential election.

Intermediate term investment grade bond yields have risen year-to-date, which means returns for many bonds with maturities beyond three years have been negative so far in 2024. If current bond market trends persist, intermediate-term bonds could post another down year, which would mean losses in three of the last four years.

Here’s a snapshot of stock and bond performance for the last six quarters:

US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

April showers gave way to flowers during the first half of May.

Stock market declines seemed to have been a function of early spring. As investors anticipated clearer, brighter weather ahead, they warmed up to stocks, though the warmth faded somewhat during the final week of May.

Large company US stocks, as measured by the S&P 500 Index, rose by 5% in May. Year-to-date, US stocks are in the black by 11.3%. Foreign stocks also returned 5% in May, and thus far in 2024 have gained 7.7%.

Small company US stocks climbed by 4% last month and are up by 4.5% so far in 2024.

Treasury bond yields were stable for shorter maturities but declined slightly for longer-term maturities in May.

For the month, the Bloomberg Aggregate Bond Index, the main benchmark for US investment-grade bonds, registered a positive return of 1.7%. Year-to-date, investment-grade bonds have declined by 1.6%.

Below is a summary of May returns:

US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK