Two years and running

Last month, the bull market turned two years old. Since bottoming on October 12, 2022, the S&P 500 Index has advanced 60% through the last day of October, according to S&P 500 data from the St. Louis Federal Reserve.

The S&P 500 Index is a market-capitalization-weighted index. Simply put, the larger companies in the index have a greater influence than the smaller ones.

Why is this important? On average, the larger companies have outperformed the smaller ones. According to S&P Global, the top 10 largest firms in the S&P 500 have nearly doubled since the S&P 500’s October 2022 low.

If each stock in the S&P 500 was equally weighted, this measure would have risen a solid 37% from its bottom on October 12, 2022, through October 31, 2024.

What accounts for the discrepancy? In part, the AI revolution has helped several large tech firms significantly outperform the broader market.

Let’s review one more index. The granddaddy of market averages, the Dow Jones Industrial Average, which is comprised of 30 companies, touched its most recent bottom on September 30, 2022. It’s up an impressive 45% through the end of October, per St. Louis Federal Reserve data.

Source: MSCI.com, Bloomberg, MarketWatchMTD returns: September 30, 2024–October 31, 2024YTD returns: December 29, 2023–October 31, 2024**in US dollars

But market strength extends beyond technology. The surprisingly resilient U.S. economy has helped fuel profit growth, which has helped drive equities higher.

While AI and a resilient U.S. economy have been significant factors, let’s consider one more. The rate of inflation has slowed, taking pressure off the Federal Reserve, which hiked interest rates sharply in 2022.

The Fed has begun to slowly take its foot off the monetary brakes, with a much-anticipated rate cut near the end of September. It was the first reduction in interest rates by the Fed since early 2020.  The Fed cut interest rates again in November and projected again in December.

But the pace next year turns murky.

Will the inflation rate continue to slow and gradually return to the Fed’s target of 2%? Will Fed policy help guide the economy to what’s called an economic soft landing? A soft landing is loosely defined as a slowdown in economic growth that leads to lower inflation without a recession.

Or, will economic growth remain strong, boosting corporate profits while slowing or ending rate cuts?

Given today’s bull market, paraphrasing what we said last month bears repeating.

Robust market performance sometimes leads to a euphoria that can encourage too much risk-taking. We caution against that.

Leaning heavily into stocks may underpin returns, but unexpected volatility from any number of sources can spark shorter-term declines that extend beyond one’s comfort level.

A balanced approach based on your individual financial goals and tolerance for risk helps tap into the long-term potential stocks have historically offered while helping to diminish some of the downside risks that can materialize when markets unexpectedly decline.

I trust you have found this review to be informative. If you have any questions or wish to discuss other matters, please don’t hesitate to contact me or any team member.

As always, thank you for choosing us as your financial advisor. We wish you and yours a happy holiday season!

Susan R. Foard, CPA, CGMA/President of Pugh Wealth Management