Market Navigator – November 2024 edition

Slight pullback but major trends intact

Global markets gave back some of the solid year-to-date gains in October. That said, the major trends we have seen most of this year persisted, such as stocks outperforming bonds, U.S. equities outperforming international markets, and large caps outperforming small caps—and these trends are consistent with our current tactical positioning. Further, we saw gold, which we became more positive on earlier this year, rise roughly 4%. 

Tension for markets remained between economic data that largely surprised to the upside and a rebound in the 10-year U.S. Treasury yield, as investors dialed back some of the Federal Reserve (Fed) rate cuts expected over the next year. Earnings largely remain solid.

The election time is nigh

Despite a modest pullback for the S&P 500 last month, the year-to-date gains through October are the strongest for any election year going back to the 1950s. These gains are supported by an economy that remains resilient and forward earnings that reached yet another record high.

“Elections matter, but other factors tend to matter more for markets in aggregate. We advise investors to look through the imminent short-term noise.”

Two pillars of this market also remain intact: 1) Don’t fight the trend, and 2) Don’t fight the Fed.

On the first point, the final two months of the year tend to be positive. In fact, the S&P 500 has averaged a gain of 4.8% in the final two months of the year when it was up more than 15% through October—it has been higher in 19 of 20 instances, or 95% of the time, since 1950.

On the second point, while there has been recent tension in the market between a stronger economy and a rebound in interest rates, we would prefer fewer rate cuts with a stronger economy than a weaker economy that needs more rate cuts.

If the economy stays resilient, that will support corporate profits; conversely, if the economy begins to weaken, the Fed won’t hesitate to become more supportive.

Still, the market has not necessarily followed the historical script this year—it’s been more serene than normal over recent months heading into the election.

Counterintuitively to history, we could see a jolt of volatility and a knee-jerk reaction once there is more clarity on the election outcome or if the election results take longer to be known.

Regardless, our view is investors should continue to focus on the primary trend and try to filter out the short-term noise.

As we have discussed all year long, elections matter, but other factors tend to matter more for markets in aggregate; these include the business cycle, monetary policy, corporate profitability, the future of Artificial Intelligence (AI), inflation, and global forces.  

There will be areas of the market where policy may become more or less favorable, but companies will continue to adjust once they understand the rules of engagement. We have seen this adaptability and dynamism throughout history. We also remain positive on the potential for productivity and earnings gains supported by AI.

Tactical outlook & positioning

The weight of the evidence suggests the primary market trends remain positive, even while we expect to see periodic pullbacks along the way.

From a global asset allocation standpoint, we maintain an equity bias, a preference toward the U.S. over international, large caps over small caps, and a focus on high quality within fixed income.

• Indeed, despite election noise, the U.S. continues to lead in innovation and earnings, built on the foundation laid by resilient and inclusive institutions.
• Stay underweight international developed markets. These markets continue to lag, making another all-time price low relative to the U.S. in October while economic trends are mixed, and the stronger U.S. dollar is a headwind.
• Incrementally, we became more positive on emerging markets (EM) in early October, though still see the U.S. as more attractive. After the initial pop higher in EM in late September, aided by the most aggressive government action from China since the pandemic, these markets have pulled back recently. China, however, is likely to continue to provide monetary and fiscal support in the months ahead. More details are expected on the fiscal side in early November, which markets will be watching closely.
• We remain neutral small caps. The asset class remains in a tug of war between a resilient economy and higher interest rates. Small caps are cheap on a relative basis, but earnings trends continue to lag large caps.
• On the fixed income side, yields are becoming more attractive after the recent rebound. We stay focused on high quality bonds for income and portfolio diversification purposes. We are neutral duration for now, being patient for a potential post-election opportunity to adjust our positioning.
• We still see diversification benefits from a modest position in gold. Gold price trends remain positive, moving to new highs in October over concerns related to the U.S. fiscal outlook along with elevated geopolitical risk, especially given the action in the Middle East. However, we have become less favorable on a relative basis to diversified commodities given elevated energy production and relative price weakness.

As always, we will continue to follow the weight of the evidence and keep you informed as our views evolve.