A Golden Year In A Stormy World?
Neil Goodson, CFA
Quick Take
Despite heightened geopolitical tensions and political uncertainty, the economy and financial markets have shown strong performance this year.
Historical evidence suggests sticking with a long-term strategy, and investing through all political regimes, is the superior approach.
Amid heightened geopolitical tensions and looming political uncertainty, bright spots remain in the economy and financial markets. Through September, the global stock market surged 19%, bonds were up 4.5%, and cash returned 4.2%. This year has favored balanced, diversified portfolios, with all major asset classes posting gains. For many investors, however, it might not feel like a 'golden year' due to ongoing global challenges.
Global growth has remained steady this year, with projections around 3.0% for 2024, supported by consumer spending and easing inflation. Growth in major economies like the US has exceeded expectations, bolstered by strong labor markets and consumer spending, but there are signs of cooling in the labor market.
Acknowledging the downshift in growth and benign inflation, the Federal Reserve delivered a 0.5% interest rate cut, larger than many economists had expected. As global disinflation continues, the Federal Reserve has increased its focus on the unemployment side of its dual mandate.
Market Performance
US equities continued their strong run, with the S&P 500, a proxy for large US stocks, up 5.5% for the quarter and returning 22% year-to-date, driven by AI-related tech stocks. However, leadership shifted in the third quarter. Shares of smaller companies and international markets have started to catch up, with European and Japanese equities showing significant gains.
In a surprising move, Chinese stocks, battered by economic challenges and regulatory concerns, jumped on fiscal stimulus designed to boost sentiment in a slowing economy. Hong Kong and Shanghai shares gained 21.7% and 17.9%, respectively, in the 3rd quarter.
After a flat first half of the year, bonds posted strong gains in the third quarter, led by corporate and intermediate maturity sectors. Yields on US Treasuries fell after a weaker August job report and downbeat data on the manufacturing sector. Supported by the Federal Reserve's decision to cut rates, investment-grade bonds gained as bond investors expect more cuts from the Fed.
What It All Means
As we write in early October, bond yields have increased as the 10-year Treasury revisited above 4%. This is in reaction to the surprisingly strong September jobs report and ongoing geopolitical tensions that lifted oil prices. This marks an essential recalibration in the bond market. Previously, bond investors were eagerly anticipating an additional 2.50% in rate cuts from the Federal Reserve within the following year. A severe economic contraction, which is unlikely, would warrant such a move.
The broadening of the gains in the stock market is a good sign that earnings growth is benefiting more sectors of the economy. Specific sectors, like manufacturing, financials, and real estate, have felt the pain of higher interest rates more than other sectors in the last year. A recovery in earnings in these sectors is a sign the economy is adjusting to a higher interest rate environment.
The US election is less than 30 days away. This has been an unusual election for many reasons, and by most forecasts, the result will be a nail-biter. Political uncertainty and anxiety are high. How the markets will react to the election is anyone's guess. If history is any guide, strong stock market performance during an election year has typically been followed by further strength. That's what the data says, and it probably has more to do with the economic regime than the political results.
Regardless, staying invested has paid off. Since 1948, a hypothetical $10,000 invested in the stock market only during Republican presidencies would have resulted in $300,000 by 2024. Had that $10,000 been invested solely during Democratic administrations, it would have grown to $1.2 million. If that $10,000 had been invested through all presidencies, it would have ballooned to an impressive $38 million. We will leave the $300K vs $1.2 million up for partisan debate. However, sticking with a long-term strategy through all administrations is superior.
A diversified stock portfolio is built for the long haul—designed to weather market volatility and deliver growth for the next decade and beyond. Expect that it will deliver ulcer-inducing swings at times. While we may not like who controls the executive branch, our democratic and capitalist institutions are designed to withstand whoever is in the Oval Office. Your portfolio should be, too.
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