Key takeaways
Despite brief setbacks in April and August, bull market momentum continues for stocks.
The S&P 500 is up 17.5% through mid-August.
Bonds are also generating positive total returns year-to-date in 2024.
Except for brief setbacks in April and early August, the U.S. stock market has mostly maintained the positive momentum that kicked off in late 2022. Through mid-August 2024, the S&P 500 is up 17.5%, following gains of more than 26% in 2023.1 However, not all segments of the market have benefitted equally.
Where today’s market stands
Markets sustained a notable setback in late July and early August, amid fears of a slowing economy. The NASDAQ Composite Index declined more than 10% from its July peak, representing a market correction. However, stocks quickly recovered lost ground.
Stock market’s year-to-date performance
So far in 2024, benchmark S&P 500 performance does not reflect performance across the broader stock market. Through August 16, 2024, the S&P 500 generated a total return of 17.47%. Meanwhile, the Russell MidCap Index gained a more modest 9.10%, and the small-cap Russell 2000 Index rose 6.56%. International stocks also lagged the U.S. market.
Bond market’s year-to-date performance
Federal Reserve (Fed) monetary policy is the main bond market driver. Throughout the year, investors have anticipated that the Fed would begin cutting interest rates. The Fed has, to this point, held the line on the federal funds target rate it controls. After the most recent meeting of the policymaking Federal Open Market Committee (FOMC) in July, Fed chair Jerome Powell indicated that labor market conditions were an increasing Fed focus.2 An early August jobs report showed slowing job growth and rising unemployment (to 4.3%).3 While stocks suffered a short-term setback on the heels of the weak jobs report, bond yields dropped below 4% for the first time since early 2024. Because bond prices rise when interest rates fall, bonds are now generating positive total returns year-to-date.4
U.S. economy still growing
The underlying economic environment demonstrates continued strength, with Gross Domestic Product (GDP), the key measure of economic growth, expanding at an annualized 2.8% rate in 2024’s second quarter. That doubled the first quarter’s annualized growth rate of 1.4%, and even exceeded 2023’s 2.5% growth rate.5 “As we look forward from here, most of the data points to a still-expanding economy,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Early third quarter signs are generally positive as well, including retail sales data showing that the consumer remains resilient,” says Haworth.
“The economy’s held up reasonably well to this point because of the strong labor market, and consumers’ fairly strong financial position,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “Corporate profits are still intact, and corporate spending remains robust.” Freedman adds says there’s an expectation that economic growth will slow, but that isn’t catching the markets off guard.
What’s driving the markets
As was the case in 2023, much of the market’s strong 2024 performance can be attributed to technology-oriented stocks. Earlier in the year, leadership broadened out to other sectors, but by May investors were increasingly focused on companies positioned to benefit from recent and projected advances in artificial intelligence (AI). “We’re still in the camp of a ‘glass half full’ for investors,” says Freedman, “The bias for stocks at this point is higher, not lower.”
In the fixed income market, Haworth says prospects of pending Fed rate cuts may not have an immediate impact on longer-term bond yields. “For 10-year Treasuries and other longer-term debt, factors like future inflation and economic growth expectations will be more important than Fed rate cuts,” says Haworth. “Fixed income investors may want to consider other options outside of traditional Treasury and investment-grade corporate bonds.”
What to invest in right now
Haworth says given the degree of uncertainty in the market, some may want to look into dollar-cost averaging as a way to effectively invest in equities. “By making regular investments over a period of time, you aren’t anchored to an investment at a single price; you stretch your investment out at different price points over time,” says Haworth. “It also gets you going on an investment plan so you can start growing your wealth now.”
Assets that are set aside to meet funding needs in the next 18 months should capitalize on today’s elevated interest rate environment by utilizing higher-yielding savings accounts, CDs and money market mutual funds. However, Haworth notes that short-term savings yields are likely to decline as the Fed cuts interest rates.
“Be prepared to take what the capital markets offer given the current environment’s realities,” says Freedman. He advises that long-term investors consider positioning their portfolios with an above-neutral mix of equities, while reducing weightings in fixed income investments. Freedman adds, “It’s critical to have a financial plan that’s tied to the specific goals you hope to achieve.” With a plan in place, you can more readily identify investment strategies that align with your goals.
Based on your situation and goals, other portfolio strategies that can play a potentially contributory role in your portfolio include:
- An S&P 500 Equal Weight index fund or ETF, which allows equity investors to capitalize on U.S. economic strength that should result in improved earnings prospects for companies that have underperformed the market to date.
- Slightly longer-than-average durations in municipal bonds, including an allocation to high-yield municipal bonds for tax-aware investors.
- Non-taxable fixed income portfolio diversification into lower quality securities, such as residential mortgage securities not backed by a government agency. This should supplement allocations to U.S. Treasury securities.
- Reinsurance as a way for trust portfolios to capture differentiated cash flow with low correlation to other portfolio factors such as market or economic trends.
Discuss options with your wealth management professional and be sure to understand the risks associated with each of these investments. Determine whether any can help you more effectively diversify your portfolio.
Freedman adds it’s important to regularly review your plan with your wealth management professional. Determine whether there are opportunities to rebalance your portfolio in ways that more appropriately reflect your investment objectives, time horizon, risk appetite and the current market environment.
Have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.
Note: Tax-loss harvesting does not apply to tax-advantaged accounts such as traditional, Roth and SEP IRAs, 401(k) and 529 plans. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies. Structured products are subject to market risk and/or principal loss if sold prior to maturity or if the issuer defaults on the security. Investors should request and review copies of Structured Products Pricing Supplements and Prospectuses prior to approving or directing an investment in these securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circ*mstances may adversely affect a bond issuer's ability to make principal and interest payments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Employing leverage may result in increased volatility. These investments are designed for investors who understand and are willing to accept these risks. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. In exchange for higher potential yields, investors assume the risk of a disaster during the life of their bonds, with their principal used to cover damage caused if the catastrophe is severe enough. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Diversification and asset allocation do not guarantee returns or protect against losses. Past performance is no guarantee of future results.
Frequently asked questions
In the current environment, investors might consider an overweight allocation to equities and an underweight allocation to fixed income. With the economy continuing to grow, equities are in a beneficial position. At the same time, fixed income investments are in a less favorable position in the short term given consistently high interest rates and elevated inflation. As always, consult with your wealth management professional to determine the most effective investment strategy aligned with your own goals and risk tolerance.
Domestic large-cap equities have been the capital markets stand out performers in 2024. The market’s performance to date has been driven by technology-oriented stocks benefiting from investor enthusiasm about developments related to artificial intelligence. As was the case in 2023, other segments of the market have lagged the performance of technology issues. Investors can consider allocating a portion of their equity portfolio to an equal-weight S&P 500 index vehicle, which de-emphasizes the largest stocks represented in a traditional S&P 500 index. This creates a better opportunity to capitalize on the upside potential of what have been, to this point, underperforming sectors of the large-cap stock market, should the U.S. economy continue to grow. A solid economy should help boost company earnings for stocks that have not fully participated in the market’s rally to date.
In the short term, markets are unpredictable, and can experience short-term up-and-down movements. Investors need to position assets designed to meet long-term goals with a willingness to withstand some short-term market movements. In today’s market, stocks have enjoyed a solid start to 2024, but not without volatile periods. Bonds lost ground in the first half of the year as interest rates moved higher compared to where they stood at the end of 2023 but are now in positive territory for the year. Although interest rates may be near a peak, bonds may not yet be positioned to experience a significant rally given that rates have remained high for an extended period of time. Be sure to consult with your financial professional to assess your own risk tolerance level and position your long-term assets accordingly.
