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Weekly Market Commentary

Dec 02
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Mitch Zacks – Weekly Market Commentary: After a Big Year, are Stocks Headed for a Big Drop?

By Weekly Market Commentary

As I write, the S&P 500 is up more than +20% for the year, and global stocks as measured by the MSCI World Index are up over 15%. Double-digit gains are prevalent elsewhere as well, across small-cap stocks, the Nasdaq, value stocks, growth stocks, and more. It’s been a strong run for equity market investors.

Barring a major correction in the final six weeks of the year, it looks like 2024 will be a ‘big up year’ for stocks. And, if the 20+% return level holds, it would mark the first time since 1998 – 1999 that the S&P 500 delivered two consecutive years of greater than 20% returns.1

This fact has many investors convinced—and others concerned—that 2025 is poised to deliver lackluster or even negative returns. If the late 1990s serves as a historical precedent, the bursting of the tech bubble in 2000 could be replicated in 2025 with a sharp reversal of artificial intelligence enthusiasm.2

I’ve written recently that investors often get a ‘fear of heights’ when the market delivers a powerful rally, particularly when valuations are already elevated. This explains some of the skepticism as we head into 2025. Where concerns get misplaced, however, is in the assumption that weak markets are caused by strong bull market rallies, and/or immediately follow them.

But that’s not correct.

In fact, strong returns often happen in clusters within a bull market, and annual returns of 20+% are not an anomaly—they’re actually quite common. If we look at just bull market years since 1932, the average annualized return for U.S. stocks is 23%, which puts 2023 and 2024 returns well within the norm.

The chart below shows S&P 500 returns since 1980. One thing readers may notice immediately is that there are far more positive years than negative ones, and a lot of them are big up years. Digging a little deeper into the data, we find that exactly one in four years from 1980 to 2024 has seen a return of 25% or greater. If we lower the bar to 20+% returns, the S&P 500 gone up that much roughly one-third of the time.

J.P. Morgan.3

I’m not arguing that investors should expect another 20+% year from the S&P 500 in 2025. But the opposite—a low single-digit or negative return—should not necessarily be expected either. From 1928 to 2023, the average return for U.S. stocks in the year following a 20+% year has been 8.92%. Not gangbusters, but not weak either.

As we look out to the end of the year and early next, we’re seeing a high likelihood of earnings growth broadening beyond the tech giants, as the Federal Reserve continues to ease monetary policy. We’ve also been seeing strong consumer spending data via retail sales, and business cycle indicators continue to show signs of holding firm. In other words, the U.S. economy remains in strong shape, in my view.

The risks I see in the market today go the other way, i.e., the risk of economic overheating. Major tax cuts and efforts to deregulate in an otherwise strong economy could cause an acceleration of investment and activity, which could in turn tip investor sentiment into the realm of too optimistic. These are all just possibilities, however—we need to see actual policy before making any forecasts or projections. And we’re not there yet.

Bottom Line for Investors

Bull markets do not downshift significantly just because stocks have risen sharply for two years in a row. Stocks do not have a mean to revert to, and corporate earnings and profit margins do not expand or contract on any sort of timeline. If corporate earnings continue to grow at a brisk pace and cash flow accelerates from one year to the next, there is no reason to assume stocks ‘need a breather’ following two consecutive 20+% return years. 2025 could easily be the third.

1 Yahoo Finance. November 18, 2024. https://advisor.zacksim.com/e/376582/-historic-rally-182124444-html/5s6pw4/1086080841/h/42NHJBj_Zn46Qb4ZFZw6MiXFNfZFZ3hyUgPeI-JvIXY

2 A Wealth of Common Sense. November 12, 2024. https://advisor.zacksim.com/e/376582/-up-years-in-the-stock-market-/5s6pw7/1086080841/h/42NHJBj_Zn46Qb4ZFZw6MiXFNfZFZ3hyUgPeI-JvIXY

3 J.P. Morgan. Guide to the Markets. 2024. https://advisor.zacksim.com/e/376582/insights-guide-to-the-markets-/5s6pwb/1086080841/h/42NHJBj_Zn46Qb4ZFZw6MiXFNfZFZ3hyUgPeI-JvIXY

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nov 21
Love0

Mitch Zacks – Weekly Market Commentary: How Investors Should Feel About the Election

By Weekly Market Commentary

The U.S. presidential election is over. With 50.3% of the popular vote going to President-elect Trump and 48.1% cast for Vice President Harris, the fact remains that the country is roughly split along party lines. That means many readers likely feel excited about the result of the election, while many feel disappointed.

Investors should feel neither.

I know it’s challenging to remain emotionally neutral in the current environment. In the days following the election, there was a frenzy of market action with small-cap stocks, energy companies, and banks rallying in a big way. The S&P 500 Index posted its best post-election day performance in history.1

However, the emotional weight of the moment can lead to bad decisions in either direction. An investor could have avoided stocks during President Trump’s first term or the last four years under President Biden, and for the same reason—because they strongly disliked the leader and his policies.

But that would have been a mistake.

Stocks have risen substantially over the past eight years and traded near all-time highs in the days leading up to the 2024 election. Thinking even more specifically, President Biden has been one of the least friendly presidents to the fossil fuel industry from a policy perspective, but the U.S. produced a historic amount of oil in 2023, and the Energy sector has been a strong performer during his tenure. President-elect Trump was a China hawk when he was in office, but Chinese stocks went up a lot while he was president.

And yet, in the days since the election, there has been a torrent of headlines and stories about capitalizing on the ‘Trump trade,’ or positioning in sectors or industries that stand to benefit from a new set of policies. In the small-cap realm, the Russell 2000 Index posted its best single-day gain in almost two years, on the theory that a looser regulatory regime coupled with tariffs and other protectionist policies could bolster small companies that largely operate in domestic markets.

The Financials sector also saw an immediate boost following the election. Bank stocks from regionals to major money center banks experienced broad gains. Expectations for falling regulatory scrutiny and rising levels of dealmaking particularly boosted small and midsize regional banks, but it also lifted larger investment banks that could benefit from a flurry of new deals and M&A across the economy – but specifically in the technology sector.

These investment ideas are all logical in theory. But they are also built on assumptions about what future policy will look like and how those policies will impact the economy. In other words, they are being driven in the short run by changes to sentiment, not changes to economic fundamentals.

History reminds us to be cautious about trading on sentiment. In 2016, Energy was the best-performing sector and small-cap stocks were the top performing asset class, arguably for similar reasons in anticipation of the Trump presidency. But investors who re-positioned because of expectations of policy impact would have ultimately been disappointed in the results: small-cap stocks went on to underperform large-caps for the next three years, and Energy was the worst-performing sector in 2018, 2019, and 2020.

Bottom Line for Investors

In my view, the stock market’s rally in the days following the election was less about pricing-in exorbitant earnings and economic growth in the future, and more about the removal of uncertainty. As I’ve written many times before, stocks don’t like uncertainty, and the fact that the election result was clear and decisive removed this potential negative.

In the coming months, there will be ample time to assess what policy changes are being enacted and what their impact on the economy could be. But it’s too early for that now, and in my view, making investment decisions or positioning a portfolio based on what could happen is a sentiment trap.

At the end of the day, investors must remember that the U.S. and global economy are extremely complex, with many different forces and trends determining the direction of the business cycle. Politics is just one piece of it.

1 Wall Street Journal. November 6, 2024. https://advisor.zacksim.com/e/376582/-c32cf952-mod-djemMoneyBeat-us/5s5glg/1079356420/h/igmgS1u11ORddSLzZHAr9PcSNvheW_WNGHvM8G0ypVE

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties.  Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index.  The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index.  The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nov 18
Love0

Mitch Zacks – Weekly Market Commentary: Amid Election Uncertainty, Remember to Focus on the Long Term

By Weekly Market Commentary

The contentious U.S. presidential election is over. Given the roughly even split among voters, it’s understandable that a great deal of readers are disappointed—and others elated—at the results. When it comes to investing, however, these emotions must be set aside. History makes it clear that the stock market has no political preference.

My message to investors this week, and in future weeks/months as the transition of power takes place, is clear: stay focused on your objectives and remember what it takes to achieve them. And that is, an asset allocation that’s aligned with your long-term goals, income needs, risk tolerance, and one that’s driven by economic fundamentals and corporate earnings. Short-term political outcomes should be walled off from these considerations.

This is not to say that the election result does not matter. It does, as the president influences and sometimes establishes economic policies. But these changes do not take place immediately—there is plenty of time to assess how campaign proposals take shape as actual policy, and/or whether many of the ideas floated on the campaign trail get watered down substantially or scrapped altogether. Remember, too, that economic cycles do not fit neatly into four-year boxes depending on what party is in power.

History reminds us to keep our cool. Since the inception of a version of the S&P 500 in the 1920’s1, there have been 24 U.S. presidential elections. In 20 of them, the S&P 500 Index registered positive total returns. In the four instances when the stock market fell, the U.S. economy was in the Great Depression, the early days of World War II, the 2000 tech bubble, and the 2008 Global Financial Crisis. Today, we have 4% unemployment, roughly 2.5% inflation, 2+% GDP growth, and solid corporate earnings growth (see below). This is the data that matters.1

Nevertheless, in the 30+ years I’ve been an investment manager, there has always been investor sentiment that if candidate ____ wins the election, it will be terrible for the stock market. But a look at past election year returns—as well as longer-term returns for U.S. stocks—demonstrates that such an outcome has never materialized. In the cases where we have seen post-election downturns, it has been tied to broader economic factors—not the election or re-election of a president.

The chart below drives this point home. If a person invested money in the stock market only when their preferred political party was in the White House, it would have meant severely reducing total return over time. This is true of both Democrats and Republicans. Investing for the long-term—regardless of who was president—clearly delivered the best result.

If investors are looking for somewhere to divert their attention in a noisy political climate, look no further than U.S. corporate earnings. The news cycle has essentially buried any mention of the stock market’s most critical driver, in my view. There are plenty of reasons to be optimistic.

Through November 1, we have seen Q3 results from 350 S&P 500 index members, or 70% of the index’s total membership. Total earnings for these 350 companies are +8.8% higher than the same period last year on +5.7% higher revenues. 74.9% of these reporting companies beat their earnings per share (EPS) estimates and 60.6% beat revenue estimates. These are solid results.

If we look at earnings and revenue growth rates for these 350 companies compared to previous periods, we find that both are solidly above average.

In terms of ‘beats percentages,’ we also see earnings and revenue well within historical averages.

Finally, if we combined current results with Zack’s estimates for the 150 companies yet to report, we find that total earnings growth for the S&P 500 index could be +6.8% year-over-year on +5.4% higher revenues. Again, these are nicely positive results, and ones that investors should focus on more than the election.

Bottom Line for Investors

Over time, the stock market responds more to long-term earnings and economic growth trends, not to changes in political leadership. The emotional gravity of an election—and this election in particular—may make it appear as though the outcome will make or break the nation. But I believe this mindset puts far too much emphasis on political figures and policies, and far too little emphasis on the real engines of the U.S. economy – corporate earnings, small business growth, investment, the consumer, and innovation. Politicians come and go, but the desire to grow, innovate, and pursue profit remains a constant.

1 The S&P 500 Index in its current form was created in 1957. However, as early as 1923, the Standard Statistics Company, which later became Standard & Poor’s in 1941, created its first stock market index, which tracked the stocks of 233 US companies on a weekly basis. Three years later, the company developed a 90-stock index that was calculated daily.2  Charles Schwab. 2023.

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties.  Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index.  The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index.  The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Oct 02
Love0

Mitch Zacks – Weekly Market Commentary: What Fed Rate Cuts Mean for the Markets and Economy

By Weekly Market Commentary

The most highly anticipated Fed meeting of the year took place on September 17-18, and with it came a 50-basis point rate cut—arguably the outcome the market hoped for. 11 of 12 Fed officials voted in favor of the cut, which lowered the benchmark Fed funds rate to a range between 4.75% and 5%. Projections released after the meeting signaled that the Fed could go further, cutting by 25 basis points at each of the next two meetings (scheduled for November and December).¹

The equity market’s response has been positive in the short term, but the financial media has not been so sure. On one hand, some pundits argue the larger rate cut is bullish because it underscores the Fed’s commitment to making a decisively dovish pivot, which should lower borrowing costs while boosting economic activity and market returns. The bears, on the other hand, argue that the Fed sees an economy in trouble, thus requiring a larger rate cut to stave off recession.

Neither camp is right, in my view.

Let’s start with the bulls. The issue I have here is one I’ve written about frequently in the past, which is the idea that there is a strong correlation between the direction of rates and the direction of stocks. In theory, rate cuts are supposed to be bullish, while rate hikes are bearish. But history doesn’t support causation or correlation between rates and stocks.

For example, if we look at every bull market from 1950 onward, it’s easy to find several instances when interest rates were rising, the economy was expanding, and the stock market was going up—all at the same time. It happened in every bull market between 1950 and 1980, and notably from 2004 to 2006 and again from 2015 to 2019. Conversely, interest rates were falling in the aftermath of the tech bubble and during the 2008 Global Financial Crisis, and stocks were falling too.

For the bears, I think there’s a case of reflexive thinking when it comes to the Fed and monetary policy. Since the Fed has historically been too late on monetary policy adjustments, bears see it as likely—or even near certain—that Fed officials have also missed the mark in this cycle.

In other words, the bulls place too much emphasis on the role that monetary policy plays on stock market returns, and the bears aren’t allowing for the possibility that the Fed can execute a soft landing.

While the bears’ critique of historical monetary policy decisions is a fair one, I view the current economic setup differently. Looking at key U.S. macroeconomic fundamentals today, this is what we see:

  • U.S. annualized GDP growth of 2.5% in 2023, with 1.4% growth in Q1 2024 and 3.0% (second estimate) in Q2 2024
  • Inflation at 2.5% (July PCE price index)
  • Unemployment rate at 4.2%
  • 10-year U.S. Treasury bond at 3.75% (as of September 20).

All things considered, these data points are quite close to where we want them to be long term. The one asterisk is the benchmark fed funds rate, which at current levels of 4.75% to 5% indicates that monetary policy is far too restrictive, in my view.

Enter current Fed policy. The 50-basis point cut seems to me to be an acknowledgment that the inflation problem is now behind us and that the Fed can now focus on moving short-term rates to a “neutral rate,” which would be significantly lower than the current 4.75% to 5%.

In previous decades, when inflation was below 2%, investment and growth were strong but rarely booming, a neutral rate of around 2.5% was the target. Looking out from today, however, with sizable government deficits, shrinking labor forces, and a shift to ‘onshoring’ manufacturing, we may see more pressures on inflation and interest rates in the years ahead. The neutral rate in this scenario may be closer to 3.5%, which implies a few more rate cuts in this cycle. Should the jobs market remain stable, and inflation remain anchored to acceptable levels—as rates continue to fall—the ‘elusive’ soft landing may be precisely what we get.

Bottom Line for Investors

I made the argument previously that rate cuts are not automatically bullish or bearish. Stocks have done well when rates are rising, and they’ve done well when rates are falling. There’s no distinct correlation.

What we know from history, however, is that the stock market does tend to perform well when rates are falling and the economy is growing. Falling rates lower borrowing costs for businesses and consumers, which can bolster investment and spending. Small-cap stocks can especially get a boost since they tend to have more floating-rate debt than their large counterparts. This relationship is only relevant in an environment where the economy is growing, which should make growth—not rates—the focal point for investors.

Sources:

  1. Wall Street Journal. September 18, 2024. https://www.wsj.com/economy/jobs/the-fed-has-significantly-improved-the-odds-of-a-soft-landing-3cbf486d?mod=djemMoneyBeat_us

​​​​​​DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Aug 28
Love0

Mitch Zacks – Weekly Market Commentary: Will September Rate Cuts Hold Off a Recession?

By Weekly Market Commentary

July’s consumer price index (CPI) report received a warm reception from equity investors and Fed watchers. Inflation had fallen to its lowest level since 2021 (2.9% year-over-year), essentially paving the way for the first rate cut in years. Like clockwork, the chatter among investors was not if the Fed would cut rates at the September meeting, but by how much.

The ensuing 25-basis point vs. 50-basis point debate harkens back to 2023 and early 2024 when futures markets were forecasting six or more rate cuts for 2024, which was at the time double the Fed’s projection. Just about everyone was wrong. As it turned out, the stock market and the U.S. economy did not need lower interest rates to perform well. While the Fed funds rate has remained over 5% for the past year, GDP growth and market returns have been solidly positive.1

Nevertheless, with the Fed poised to cut interest rates at the September meeting, investors are once again being drawn into the narrative that lower rates are essential to stave off a recession and to keep the bull market going.

I still don’t buy that argument.

If we look at every bull market from 1950 onward, it’s easy to find several instances when interest rates were rising, the economy was expanding, and the stock market was going up—all at the same time. It happened in every bull market between 1950 and 1980, and notably from 2004 to 2006 and again from 2015 to 2019.

But you don’t need to be a market historian to find a time when rising interest rates aligned with rising stocks. It happened just over a year ago. In the chart below, readers can see the Fed funds rate (blue line), the 10-year U.S. Treasury bond yield (green line), and the S&P 500 index (red line) from March 2022 to August 16, 2024. In this period, interest rates have climbed, and so have stocks.

Source: Federal Reserve Bank of St. Louis2

To be more specific, from March 2022 to August 2024, this is what we’ve seen:

  • Benchmark Fed Funds Rate: went from 0% to 5.25% – 5.5%
  • 10-year U.S. Treasury Bond: went from 1.75% to 3.9%
  • S&P 500 Index: went from 4,385 to 5,550 (up over +25%)

The idea that the U.S. economy and the stock market’s fate are in the Federal Reserve’s hands is simply not substantiated by what we know from history, or even from 2024. Interest rates have remained ‘higher-for-longer’ all year, and stocks have powered higher.

Monetary policy decisions are not meaningless, of course, but my argument here is that they are not as important as many investors think them to be.

In my view, what would hurt markets most is if inflation and inflation expectations start to drift higher and become un-anchored from their current 2.5% to 3.5% level, perhaps because of some unforeseen shock in geopolitics or the global economy. If the Fed is forced to go in the other direction—raising rates instead of cutting them because of a negative inflation surprise—I think that could be very detrimental to stocks. For now, however, inflation data continues to show the opposite, with gradually falling prices alongside signs of weakening in the jobs market—neither of which calls for higher rates.

Bottom Line for Investors

We know in the current environment that the Fed believes monetary policy is sufficiently restrictive, and with improving inflation readings and the unemployment rate rising from 3.7% at the beginning of the year to 4.3% in July, there is no expectation that interest rates will go any higher.

It’s also true that markets move on surprises, so if the Federal Reserve ended their September meeting with no rate cuts and a hawkish overall tone, I’d expect a volatile response from the stock market. But if the concern is whether the Fed will cut rates by 25 basis points or 50, and/or whether they will offer guidance for future rate cuts in November and December, I do not believe these are the outcomes influencing stocks most. Investors can frame market outlook in terms of shifting expectations around interest rates, but doing so means ignoring

Sources:

  1. MSN. 2024. https://advisor.zacksim.com/e/376582/nty-on-economy-fed-ar-AA1oR5UK/5rnv64/1004854014/h/ULpPPkTMOl6paVv1MMHY1qrsZfbyRpsK4lxorOHkkKE
  2. Fred Economic Data. August 19, 2024. https://advisor.zacksim.com/e/376582/series-DFF-/5rnv67/1004854014/h/ULpPPkTMOl6paVv1MMHY1qrsZfbyRpsK4lxorOHkkKE

​​​​​​DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Aug 07
Love0

Mitch Zacks – Weekly Market Commentary: Are Dispersion and Concentration in the Stock Market Too High?

By Weekly Market Commentary

Q2 2024 U.S. GDP Numbers Quiet the Naysayers

Underestimating the U.S. economy’s fundamental strength was a theme in 2023. At the outset of the year, nearly every polled economist predicted the U.S. would enter a recession as the Federal Reserve raised interest rates, with a stated goal of lifting the unemployment rate to tame inflation. Instead, the economy grew 3.1% for the year and added nearly 3 million new jobs.

Fast forward to 2024, and the U.S. economy still has its doubters. It is common to see the argument that the U.S. consumer is tapped out—pandemic savings are gone, people are increasingly frustrated by nominally higher prices, and households are weighed down by rising debt loads and high interest rates.¹

Yet the economy keeps chugging along.

In the second quarter, the Commerce Department reported that the U.S. economy expanded at an annual rate of 2.8%, to a level of $22.9 trillion. That’s significantly more than the 2.1% rate economists had expected, and it also marks a significant acceleration from the 1.4% annual GDP growth rate posted in Q1 2024.

Real GDP Percent change from preceding quarter

From an investment perspective, the elements of GDP that matter most to stocks—private sector components and consumer spending, in my view—were solid nearly across the board.

Breaking these down, we saw businesses investing in commercial construction, equipment, and software at a stout 5.2% annualized rate, up from 4.4% in the last reporting period. Capital expenditures (capex) were driven by an 11.6% increase in spending on equipment and a nearly 5% increase in software/intellectual property investment, which in my view demonstrates that corporations are going on offense—not what you’d expect to see in a tenuous economic environment.

Capex Jumped in Q2 2024, as Businesses Invested in More Equipment and Software

Source: Federal Reserve Bank of St. Louis³

U.S. consumers also had a good quarter, continuing a trend that has lasted years now.

Sometime in 2023, we started hearing about pandemic savings running dry, and pockets of weakness appearing in the labor market. More recently, I’ve seen warnings of rising delinquencies and consumers feeling squeezed by higher prices and the effects of higher borrowing costs. While much of this is true, it simply hasn’t translated into a consequential pullback in spending.

To be fair, solid consumer spending data in Q2 owes partially to a weak first quarter, when spending on goods fell -2.3% annualized. The base effect made a rebound in spending easily attainable, and consumers delivered. But if consumers are feeling pinched by the effects of high inflation and borrowing costs, there’s some positive news as it relates to the outlook from here: inflation continues to moderate, and I expect borrowing costs to move lower—not higher—in the next year.

To add, U.S. consumers continue to benefit from a steady labor market where wages (blue line in the chart) are rising at a faster-annualized pace than inflation (red line, CPI). These rising real wages give U.S. consumers more spending power in the face of inflation, not less.

Wages are Rising at a Faster Annual Pace than Inflation

Source: Federal Reserve Bank of St. Louis⁴

Putting it all together, the odds of a “soft economic landing” keep going up, as economic growth continues apace while inflation continues to moderate. From an investment standpoint, that’s good news for stocks, in my view. But it could be especially positive for small caps.

With Fed funds currently between 5.25% and 5.5% and the latest inflation reading (according to the Fed’s preferred measure, the PCE price index) at 2.5%, monetary policy is quite restrictive. An outlook that interest rates will be lower in the future than they are today is a constructive setup for small-cap stocks.

Valuations should help this setup. Because large-cap growth stocks have had an impressive run especially relative to small-cap stocks, there’s a valuation gap that makes small-cap stocks look inexpensive on a relative basis. As of the end of Q2 2024, for instance, small-cap value stocks were trading at 96.7% of their 20-year average P/E, while large-cap growth stocks were trading at 149.2% of 20-year P/E averages. If rate cuts do come and the U.S. economy continues to surprise to the upside, small-caps could easily lead to the next phase of the bull market.

Bottom Line for Investors

I do not want to paint the picture that the U.S. economy is in perfect shape with few risks to growth. But I also think it is not accurate to frame the economy in doubtful terms or to say it is performing poorly, as many do. The second quarter GDP data—along with the past years’ worth of better-than-expected economic data—proves that the U.S. economy is still expanding solidly, despite higher interest rates. Stocks’ strong performance underscores as much.

Sources:
1) Wall Street Journal. July 25, 2024. https://advisor.zacksim.com/e/376582/onomy-trendingnow-article-pos3/5rgbvn/995489872/h/rzfemz5s5glno4BcDjR2i1bijQUtGYXxlVMBO0NUtUI
2) BEA. July 25, 2024. https://advisor.zacksim.com/e/376582/ata-gdp-gross-domestic-product/5rgbvr/995489872/h/rzfemz5s5glno4BcDjR2i1bijQUtGYXxlVMBO0NUtUI
3) Fred Economic Data.
4) Fred Economic Data. July 5, 2024. https://advisor.zacksim.com/e/376582/series-CES0500000003-/5rgbvv/995489872/h/rzfemz5s5glno4BcDjR2i1bijQUtGYXxlVMBO0NUtUI

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

 This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

 Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index. 

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

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