Looking Forward: Wrapping Up 2024
It’s getting harder to find truly undecided folks in politics these days, but there are still some heated debates and shifting opinions in the markets. With about ten weeks left in what’s been a rewarding (and somewhat surprising!) year for investors, a few big questions are still up in the air.
What’s going on with bonds?
The recent rise in Treasury yields has everyone wondering: Does this confirm the economy is on track for a soft landing, challenge that idea, or threaten it? And is the market already trying to predict how the upcoming election could steer economic policy?
When the Federal Reserve cut short-term rates by half a percentage point back in September, the 10-year Treasury yield was at 3.6%. Fast forward to now, and it’s shot up past 4.2%. That caught a lot of investors off guard, especially those betting the Fed would stay aggressively “dovish” (keeping rates low). Instead, strong economic data started rolling in, forcing markets to adjust their expectations—now thinking future rate cuts might not come so quickly.
Some view this jump in yields as the market calling out the Fed for possibly easing too much, too soon. Others see it as proof that the Fed is trying to strike the right balance: lowering rates just enough to support the economy without letting the labor market weaken too much. For context, yields are now back at levels seen in late July, right before a weak jobs report stirred fears of a slowdown. And if we look to history, the last time the Fed pulled off a “soft landing” was in 1995, when a similar rate cut initially pushed yields higher before they settled back down.
So, a 10-year yield around 4.2% isn’t totally out of line, considering the U.S. economy is growing at a 5.5% pace right now. Some analysts say this yield might even be on the lower end of what’s reasonable. As things stabilize, buyers might be jumping back into bonds soon (if they haven’t already!).
What about the election?
With the election right around the corner, market chatter about politics is ramping up—because, let’s face it, everything seems to get wrapped into election talk. Historically, though, elections don’t tend to be major turning points for markets. In fact, investors are usually just relieved once the results are in, and stocks often perform well regardless of the winning party.
That said, there’s a lot of speculation about how a Trump win might impact markets, given the policies he promoted during his first term—like lower taxes and tighter trade policies. Markets have recently shown some signs of pricing in this outcome, with banks and cyclical stocks doing well, along with rising bond yields and a stronger dollar. But it’s tricky to say how much of this rally is due to election speculation versus solid economic data (like stronger-than-expected job numbers and retail sales).
Even if Trump were to win, today’s economic environment is very different from what it was in 2016. Back then, inflation was low, and the economy needed a boost. Now, the Fed has spent the past couple of years trying to cool inflation, so another round of stimulus would probably not be welcomed in quite the same way.
Looking ahead: How much more can this bull market run?
The S&P 500 has been on a tear, up 40% from April 2023 through October 2024, with valuations now sitting at 22 times expected earnings. That’s a lot higher than where things stood in the lead-up to the 2016 election. As a result, some investors are wondering how much room there is left for stocks to keep climbing.
Some financial firms are warning that the election might trigger a “sell-the-news” reaction—meaning, once the event is behind us, markets could pull back a bit. And while Goldman Sachs recently forecast modest annual returns of around 3% for the S&P 500 over the next decade, other analysts argue this outlook might be too pessimistic. Some even think that setting lower expectations now could help investors stay disciplined and continue investing through market ups and downs.
In the end, markets have held up remarkably well. Despite some wobbles, the S&P 500 is hovering near record highs, credit spreads remain tight, and the Fed seems committed to a steady, patient easing strategy. While no one knows for sure what the future holds, history suggests it’s often smart to stay invested—especially when everyone else is busy worrying. After all, surprises can go both ways.
