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Market Commentary

Monthly Financial Markets Commentary — September 30, 2024

Stocks advanced in the month of September as investors believe the goldilocks scenario has come to pass and that the Federal Reserve has engineered the perfect landing with not the slightest chance of a recession. The consensus is that recent GDP, employment and inflation reports all point to an economy that is growing at a decent pace, with inflation moderating and the jobs market remaining reasonably strong. If this is true then the Federal Reserve indeed has achieved something remarkable, especially in light of a collapse in full-time employment, a falling workweek, an exploding federal deficit, the steepest rise in interest rates in 40 years and global political turmoil.

Breadth in the market has improved somewhat but still remains narrow with the "Magnificent Seven" accounting for most of the recent gains in the indices. Too much attention is probably being paid to these seven stocks, however, as there are many other stocks that are also quite expensive by historical standards. These stocks are outside the technology area, but have been dubbed "quality" stocks, for consistent earnings, dividends, etc. They retain the moniker of "quality" investments regardless of the price to which they have risen.

By historical measures, such as price-earnings, price-to-sales, market-cap-to-GDP, Schiller CAPE Ratio, stocks are significantly overalued. This is not surprising given that every dip in the market since 2010 has proven to be a buying opportunity and an entire generation of investors and investment advisors believe the stock market only goes up. It is no mere coincidence that during this same period the Federal Reserve engaged in massive money printing, Traditional valuation measures based on GAAP earnings have been abandoned in favor of myriad alternative EBITDA measures that invariably result in a more flattering picture of the financial state of companies.

For 2024 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 20.82%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 19.69%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 13.35%. All returns are on a total return basis in that they include dividends.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned 4.54% for the year, as interest rates have fallen since the start of the year. Investors have cheared falling inflation and the Fed's 50 basis point Fed funds rate cut. But there are several trends that do not auger well for longer-term interest rates. The government is running gargantuan deficits and it is unclear who the buyers of all this newly issued debt will be (probably not China or Japan, the traditional buyers of U.S. government debt). Investors have largely attributed falling short-term interest rates to positive factors such as falling inflation; however, an alternate interpretation is that rates are falling due to decelerating economic activity, stretched consumer and corporate balance sheets and woes in commercial real estate. Curiously, long-term rates have recently not moved in tandem with Fed funds rate, indicating that the Fed may have only very limited control over long-term rates.

The sectors in the equity market that have performed the best in 2024 are Communications Services, Utilities and Information Technology at 27.5%, 27.2% and 29.1%, respectively. Energy, Real Estate and Materials have fared the worst at 4.7%, 11.2% and 11.0%, respectively. The fact that even the laggards are experiencing significant gains indicates how pervasive bullish sentiment is.

The comparison of current price/earnings ratios and dividend yields as of September 30, 2024 to those of the prior year is as follows.

* based on 12-month trailing data

It is to be noted that much of the advance in markets so far is due to multiple expansion rather than fundamental factors such as increasing earnings.

Gold and crude oil most recently traded at $2.675.75 and $71.50, respectively, compared to $1,825.35 and $88.75 one year earlier. Gold has risen in reaction to global political instability and increased holdings by all central banks; crude oil has fallen recently due to softness in the global economy. Year to date Gold has outperformed the S&P 500 index.