Weekly Market Commentary Archives

Mar 04

Mitch Zacks – Weekly Market Commentary: Investors Should Start Looking Beyond the Fed

By BayTrust Financial Weekly Market Commentary

Are You Overexposed to Growth Stocks?

Most investors are aware of the outsized impact growth stocks have had on total returns in the U.S. stock market, at least for the past couple of years. In 2024, the mega-cap technology companies often referred to as AI “hyper-scalers” accounted for 41% of the S&P 500’s total return. And perhaps not surprisingly, the two best performing sectors last year were Communications Services and Technology, where many growth stocks can be found.

Growth stocks have no doubt done well. But there is also a narrative that ‘growth’ is the only category that matters, especially given the view that we could be in the early stages of an AI-driven economic transformation.¹

I’m not writing to say this is wrong, or that growth stocks’ momentum is coming to an end soon. My goal in this week’s column is to remind investors that a pure growth mindset can introduce risk in an investment portfolio—whether it’s from over-allocating to growth stocks or underweighting other attractive categories, like value stocks.

2024 offers a useful case study for the argument I’m making. As mentioned, Technology stocks led the way. But we also saw improving performance outside of the Big Tech category, with the median stock in the index returning +12% and leadership changing hands throughout the year. In the second half of the year specifically, value stocks and growth stocks performed roughly in-line with each other, as value staged a strong rally starting in July. A diversified portfolio could have captured this upside with less overall risk.

Investors who simply own an index may think they’re getting this same level of diversification, but they may actually have greater exposure to growth stocks than they’re aware of. Case-in-point: growth stocks made up over 35% of the S&P 500 Index as of the end of last year, which is substantially above the historical average of 24%.

Consider that owning the S&P 500 today could mean over-allocating to growth stocks and under-allocating to value stocks, which means having a portfolio overweight to stocks that trade at high multiples. Value stocks, by contrast, trade at relatively attractive levels today, and are far below their long-term median valuation. I estimate that value stocks would need to rise by some 40% just to get back to this historical valuation.

While past performance doesn’t guarantee future results, it’s noteworthy that the last time the valuation disparity between the Russell Growth and Russell Value indexes was as extreme—back in December 2000—value stocks went on to substantially outperform growth stocks over the following one, three, and five years. High-growth stock prices might eventually steer investors toward more reasonably priced options and expand the market focus beyond just the largest firms.

There’s also an earnings case for looking beyond growth. In aggregate, pretax corporate profit margins are near record levels, and the “non-Magnificent Seven” stocks in the S&P 500 are poised to see double-digit earnings growth for the first time in four years. While the Technology sector is expected to see strong double-digit earnings growth as well, Tech earnings growth is poised to decelerate in 2025 while other sectors in the S&P 500 could see accelerating earnings growth. Investors tend to prefer the latter.

Bottom Line for Investors

Growth stocks have undeniably driven recent market momentum, and have commanded leadership over value for much of the past decade. But over-committing to the growth theme not only increases risk in a portfolio, in my view, it also misses out on other areas of the market that trade at attractive valuations and could see accelerating earnings growth this year.

Growth stocks may grab the headlines, but emerging opportunities in other sectors are equally compelling. As market valuations shift and uncertainty rises, investors with diversified portfolios—like we manage here at Zacks Investment Management—can better position themselves for tomorrow’s gains.

¹Black Rock. 2025. https://advisor.zacksim.com/e/376582/stocks-underweight-and-unaware/5sndxr/1161199135/h/VLtq2YXm2Rfa8n9y687OZE2OFHPBjPenlz9ruOK-XeA

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

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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.

Feb 11

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Mitch Zacks – Weekly Market Commentary: The Current Equity Risk Premium is Zero. Should Investors Ditch Stocks?

By BayTrust Financial Weekly Market Commentary

Stocks and Bonds Offer Similar Yields. Does That Make Stocks Too Risky?

As I write, the S&P 500 trades at roughly 22x projected 2025 earnings, and the 10-year U.S. Treasury bond yields roughly 4.5%. That makes the earnings yields on stocks and bonds basically the same.

For clarification, the earnings yield on stocks is derived by dividing the stock market’s expected earnings by its price, which currently equals about 4.5%. When you compare this earnings yield with current bond yields, that gives you the equity risk premium, which theoretically tells investors how much extra reward stocks should offer over bonds.¹

As readers can see, that reward is essentially zero today—which also marks the first time we’ve seen the equity risk premium this low since the tech bubble burst.

It is logical to assume that the lower the equity risk premium, the weaker the case for owning stocks versus bonds. After all, according to this metric, investors are not being compensated at all for taking the additional risk of owning stocks over Treasurys. There’s also the case of the late 1990s, when the equity risk premium turned negative and a bear market followed.

In my view, there’s a very reasonable risk argument to be made here about the stock-bond decision. But where the argument starts to fall apart, in my view, is in assuming that a low or even slightly negative equity risk premium tells us anything about future returns. When we look back on history at the relationship between the equity risk premium and forward 12- or even 24-month returns on the S&P 500, the case for correlation fizzles. And there’s essentially no argument for causation.

In 1996, the equity risk premium fell below zero and stayed negative basically until the bear market started in early 2000 (the equity risk premium turned positive for a short time in 1998 with the market correction). Investors could have used this metric to get out of stocks in 1996, but that would have been a mistake. There was still plenty of runway left in that bull.

On the flip side, the equity risk premium was nicely positive—roughly 3%—at the start of the 2008 Global Financial Crisis, and there were periods in the 2010s when bonds outperformed stocks even though the equity risk premium suggested stocks were the better buy. As mentioned, it’s difficult to find a convincing correlation between the equity risk premium and forward returns. There have been many instances where the signal seems to work and others where it doesn’t.

The key thing to remember, in my view, is that stocks’ earnings yield—again, theoretically—tells investors what return they should expect over the long run if earnings stayed constant and no dividends were paid. But as we all know, many stocks pay dividends, and earnings are rarely constant. As we begin to parse Q4 2024 earnings, the picture that emerges is one of improving outlook, with companies not only coming ahead of estimates but also providing reassuring guidance for coming quarters (see chart below).

There’s a scenario where earnings come in far better-than-expected in 2025, while long-duration Treasury bond yields remain range-bound. That would be a positive scenario for stocks, in my view, regardless of whether the equity risk premium turned positive or not.

Bottom Line for Investors

The equity risk premium is a useful metric that investors can use in evaluating the stock-bond decision, but it’s certainly not the only consideration, in my view. Investors should also think about where they expect interest rates, inflation, and earnings to be a year from now, which is another way of assessing whether the equity risk premium is expected to rise or fall looking forward. From my vantage, I expect inflation to moderate, earnings to accelerate, and growth to continue above trend—all of which bolster the case for equities, in my view, even as Treasuries now offer a more attractive risk-free rate.

¹Wall Street Journal. January 27, 2025. https://advisor.zacksim.com/e/376582/bonds-has-disappeared-c3f9c223/5sksqg/1143709360/h/oV5BlINqgf8gjfV1x98TM8Vm5hn9sYINQwDJg8KhF_A

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

Jan 07

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Mitch Zacks – Weekly Market Commentary: Is the Fed Steering the U.S. Economy and Stock Market?

By BayTrust Financial Weekly Market Commentary

Are the U.S. Economy and Stock Market in the Fed’s Hands Now?

The Federal Reserve made some waves at the end of last year.

The 25 basis-point rate cut they announced at their December meeting was widely expected. What the market was not expecting, however, was the insinuation that rates may not necessarily follow the downward trajectory the Fed had previously projected. The one particular comment that jolted markets appeared to be when Chairman Jerome Powell said: “From here, it’s a new phase, and we’re going to be cautious about further cuts.”

Cautious about further rate cuts? Wasn’t the inflation fight largely won, with the benchmark fed funds rate destined to fall back to a neutral rate in the 3% to 3.5% range? The financial media and investor community were aghast at the news.

My advice to investors: do not overthink or overstate the importance of rate cuts in 2025. The economy and markets can do just fine with or without them.

Just take 2024 as your prime example. At the end of 2023, futures markets were forecasting six or more rate cuts for 2024, which turned out to be quite wrong. As it turned out, the Fed cut rates three times during the year, lowering the fed funds rate to a range of 4.25% to 4.5%. The economy and stock market did not seem to mind the ‘higher-for-longer’ level of rates, with GDP growth coming in strong and stocks rallying more than +20%.

If we know the economy and stock market can perform well even with the benchmark fed funds rate north of 4.5% or even 5%, then why would a 4% level of rates somehow be prohibitive to growth? Fed officials projected at the December meeting that rates would finish 2025 at 3.9%, which is one fewer cut than they had suggested at the September meeting. Investors who are up in arms over this news are missing the big picture, I think. I do not see 25 basis points in either direction as a very meaningful move.

The big debate in markets now is where the so-called “neutral rate” is for benchmark fed funds. The neutral rate is a moving target depending on economic conditions—it’s the rate of interest that sustains the economy at full employment with stable inflation. In other words, the interest rate that keeps the economy not too hot, and not too cold. If consumers and businesses are borrowing and spending too much, and inflation starts to tick higher again, it likely means rates are too low. If the jobs market is loosening and lending activity is tepid, rates may be too high.

If you want to know exactly where the Fed sees the neutral rate today, you will not get a clear answer from Chairman Powell. After the December meeting, he said: “We don’t know exactly where it is, but … what we know for sure is that we’re a hundred basis points closer to it right now.” Some Fed officials think it’s closer to 3%, some say it’s 4%. Perhaps it’s somewhere in between.

The point I’d repeat here is that I’m not sure the level of rates matters as much as many think. The idea that the U.S. economy and the stock market’s fate are in the Federal Reserve’s hands—and hinges on whether they get the neutral rate exactly right—is simply not substantiated by what we know from history, or even from 2024 for that matter. Interest rates remained ‘higher-for-longer’ all year, and stocks powered higher.

Monetary policy decisions are not meaningless, of course, but my argument here is that they are not as important as many investors assign 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 modest progress toward the Fed’s long-term goal. In November, the Fed’s preferred inflation gauge—the PCE price index—came in at 2.4% year-over-year, well within striking distance of the target.

Bottom Line for Investors

With inflation hovering near its target and the unemployment rate at 4.2%, there is little expectation that interest rates will go any higher. Whether or not they go lower, and by how much, is an ongoing debate. But it’s not one I think investors should be focused on. If you spend too much time framing your market and economic outlook around shifting expectations for interest rates, it may mean de-emphasizing stocks’ main driver—earnings growth.

By understanding 2024’s market surprises, you can unlock valuable insights to stay ahead and capitalize on opportunities in 2025.

DISCLOSURE

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

Dec 30

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Mitch Zacks – Weekly Market Commentary: Is the “January Effect” Actually a Thing?

By BayTrust Financial Weekly Market Commentary

The January Effect

Darren L. from Boise, ID asks: Hi Mitch, Happy New Year! I’m curious if you think there’s anything to the so-called “January Effect”? It feels like 2025 is set up for a January rally given the choppiness that happened last December. I’m asking because this year I plan to sell stocks to have cash for the full year, and I’m wondering if I should go ahead and do it or wait until prices recover. Thanks for your insight!

Mitch’s Response:

Thanks for writing, Darren, and Happy New Year to you as well! The January Effect, in my view, is one of the many ‘seasonal effects’ that may have worked for a time historically, but whose predictive power probably diminished at this point.

Early in my career, there was something to it—many investors and mutual funds would harvest gains and losses near the end of a calendar year, and then scoop those shares back up in January. There was a reasonably good argument that these actions helped bolster stock prices in the new year. Going back to 1928 (which predates the current S&P 500 as we know it), January would see an average return of +1.2%.¹

But the ‘effect’ is far less pronounced today. Looking at just the last 35 years, the average return for the S&P 500 in January is +0.5%, which doesn’t make it much different than any other month in the year. Now to be fair, I have seen some recent research showing that the previous calendar year’s laggards tend to outperform in January. In the last 35 years, S&P 500 companies that declined by -10% or more in the previous calendar year post an average return of +2.3% the following January. But I’m not sure this seasonal trend makes for a very robust investment strategy.

As it relates to your question, I would certainly advise against trying to strategically sell stock or other securities on such a short time frame. Your strategy to raise cash should be more about keeping your investment portfolio’s asset allocation aligned with your goals, risk tolerance, and time horizon. It should not necessarily be about making the most profitable trade in a four-week time span.

Big picture, the data clearly showed the January effect was real for many decades. But in my view, markets eventually discounted the positive surprise – deeming it no longer effective. Markets work efficiently to discount widely known information, in my view, so it was only a matter of time before the January effect stopped working.

¹UBS. December 11, 2024. https://advisor.zacksim.com/e/376582/arketnews-article-1729783-html/5scgnj/1113594162/h/1jKdAg0gX51xM_PO4BEci1bvkW0YcvXLuTh2SIf-tt8

DISCLOSURE

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

Dec 17

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Mitch Zacks – Weekly Market Commentary: The Growing Risk to Long-Term Investor Returns

By BayTrust Financial Weekly Market Commentary

The Growing Risk to Long-Term Investor Returns

Humans are not wired to be successful long-term investors.

We are too emotional, have too many biases, and frequently make decisions outside of an established, disciplined framework. At the end of the day, we listen to “our gut” too much.

To be a successful long-term investor, one needs to inhabit the exact opposite traits. We should approach investment decisions dispassionately, with a disciplined process, and devoid of emotion and bias. Of course, that’s easier said than done.

For me to say investors are prone to missteps probably does not strike many readers as newsworthy. There is plenty of research affirming this point. For instance, the research firm DALBAR has been publishing their Quantitative Analysis of Investor Behavior report for 30 years, and it consistently shows that retail investors are underperforming markets. DALBAR’s report compares the returns equity markets are delivering versus the returns investors are realizing. There’s consistently a gap, and the 2024 report was no exception.¹

According to DALBAR, the average equity investor underperformed the S&P 500 Index by 5.5% in 2023, marking the third-largest performance gap in the last decade. Underperformance was seen in the fixed-income realm as well, with the average fixed-income investor underperforming the Bloomberg Barclays Aggregate Bond Index by 2.63%. The research continues to indicate that emotional decisions are hurting investor returns. Investors sell during downturns and miss rebounds, and they get overconfident during strong rallies. Both actions tend to hurt returns.

Zooming out to 20-year returns, the average equity investor earned an annualized return of 8.7% according to DALBAR, while the S&P 500 Index has delivered an annualized return of 9.7% over the same period. This 1% difference in annualized return may not seem like much, but on a $1M initial investment, it would mean having roughly $5.3M at the end of the 20-year period for the average investor, instead of $6.3M. Simply put, that’s huge.

As I mentioned previously, investors may be aware of this issue already. What’s new, however, is research suggesting that the problem may be getting worse.

A finance professor at George Mason University analyzed all return data for U.S. dollar-denominated mutual funds over the last 10 years, separated actively managed funds from index-tracking passive funds, and then looked at the difference between the stated annual return and the actual dollar-weighted return in the fund (known as the return gap). This gap is very similar to the one published by DALBAR—it shows the average return for the fund versus what the average investor actually experiences.

This new study confirmed what DALBAR has been saying for decades—that the average investor underperforms. What’s different is the level of underperformance observed from 2015 to 2019 (pre-Covid) compared to 2020 through October 31, 2024. In the pre-Covid period, poor market timing cost investors 0.53% per year. In the post-Covid period, however, that number nearly doubled to 1.01%. Interestingly, the area where investors are seeing the most damage to portfolios is in actively traded small-cap funds, perhaps because of information being scarcer and volatility being more prevalent. The average return gap was 0.62% before Covid, but it has grown to 1.38% since.

While this is consistent with DALBAR’s long-term finding, the more recent study suggests that the trading practices that have become popular in the wake of the pandemic—whether it’s day-trading, being actively engaged on discussion boards, experimenting with options and other derivatives, etc.—are costing investors dearly. As far as I can tell, these ‘trading strategies’ are only becoming more popular, which means the risks to investors’ long-term returns could continue growing over time as well.

Bottom Line for Investors

The retail investment community was relatively strong and growing before the pandemic, but there is a good argument that stimulus money and more time spent at the computer—combined with the proliferation of trading platforms and discussion forums—has catalyzed retail investor participation. Generally speaking, I view this trend as a good thing. It means more people are investing in markets, which hopefully enables more people to generate wealth over time.

The research cited above suggests that many investors are missing the forest for the trees. Instead of owning equities long-term because investors want to participate in value creation and earnings growth, they’re focusing too much on daily price changes, event-driven market news, or the latest social media investment buzz. That’s the opposite of a long-term, disciplined approach, and it’s costing investors.

¹Wall Street Journal. December 5, 2024. https://advisor.zacksim.com/e/376582/-7e5af96a-mod-djemMoneyBeat-us/5s9yk4/1105472349/h/awbVFROscF6XrYoJa7QiRfHVECoWO88qmbvtNLwG9WI

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

Dec 12

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Mitch Zacks – Weekly Market Commentary: Can the Post-Election Rally Last to the End of the Year?

By BayTrust Financial Weekly Market Commentary

At the outset of 2024, most large banks were forecasting the S&P 500 Index to finish around 5,200, which would have implied a roughly 10% gain for the year. U.S. stocks had different plans.

Bolstered by stronger-than-appreciated U.S. consumer spending, steady economic and earnings growth, declining inflation, and the Federal Reserve’s pivot to looser monetary policy, U.S. stocks have delivered a rally over double the magnitude of most expectations.¹

The U.S. presidential election seems to have catalyzed the momentum. In the week following the election, the S&P 500 Index jumped +4.7% – the strongest week since October 2022. I’ve argued before that the ‘removal of uncertainty’ was a key driver of this short-term market strength, but I also think it’s fair to say the market was pricing-in hopes for lower taxes and lighter regulation, both of which could promote growth.

The question for investors is, can this post-election rally continue through the end of the year?

I think it can.

The first factor I’d consider is seasonal. Looking back to 1950, December ranks as the second-best performance month for the S&P 500, with an average gain of 1.3%. But December is also the most consistently positive month, with the highest frequency of advances of any month with the lowest volatility (based on data since 1950). On average, gains have been broad-based, but small- and mid-caps have tended to outperform historically.

Strong gains leading up to December have also ushered in a strong close to the year. In the last ten instances when the S&P 500 Index entered December up more than +20%, the final month saw an average gain of +2.4%. In this historical context, strong gains beget more strong gains.

I also think the market could keep pricing-in major policy shifts as the new administration’s agenda comes into clearer focus. The prospect of sizable fiscal stimulus (tax cuts) into an economy that’s already growing roughly 2.5% to 3% could be a significant catalyst to growth, and it could also mean adding to an already historically large U.S. fiscal deficit. In my view, this could put upward pressure on long-duration U.S. Treasuries, which could finally un-invert and eventually steepen the yield curve (Fed rate cuts would also help). A steeper yield curve would arguably help Financials while also having the potential to stimulate more lending, an economic positive.

The Yield Curve Could Steepen with Further Fed Cuts and Rising Long-Duration Treasury Yields

Source: Federal Reserve Bank of St. Louis²

Finally, no commentary about the potential for more stock market appreciation would be complete without talking about earnings.³

For the third quarter, total earnings for the S&P 500 index are expected to be up +8.1% from the same period last year on +5.7% higher revenues. If we exclude the volatile Energy sector, whose Q3 earnings were down -22.9% from the same period last year on -2.7% lower revenues, then earnings would have been up +10.6% on +6.3% higher revenues. This level of solid earnings growth has been present throughout 2024, and as seen on the chart below, is expected to accelerate in the new year:

A final point to make on earnings is that unlike the unusually high magnitude of estimate cuts we had seen ahead of the Q3 earnings season, estimates for Q4 are holding up a lot better, as the chart below shows. Heading into the final stretch, companies are feeling more confident about sales and earnings than they were previously.

Bottom Line for Investors

I want to be clear that while I think stocks can continue to rally into the end of the year and early next, based on the factors laid out above, I am not suggesting they will rally. No one can truly predict what stocks will do in the short term, and downside volatility and/or a correction can occur at any time and for any reason.

Thinking further ahead, I do think economic fundamentals remain supportive of higher equity prices, and earnings and economic growth could benefit from lower taxes and looser regulation. In other words, the ingredients for more equity market gains are present, it’s just a matter of whether the realities of those policies and growth will meet and/or exceed expectations. For now, I think they can.

¹Black Rock. November 20, 2024. https://advisor.zacksim.com/e/376582/vidual-insights-election-rally/5s8v1t/1098587475/h/lpAEtTBFFKn6Ol5QwGYSy7rFtGjMG6N-c6dLF5__9Rw

²Fred Economic Data. December 3, 2024. https://advisor.zacksim.com/e/376582/seriesBeta-T10Y3M-/5s8v1x/1098587475/h/lpAEtTBFFKn6Ol5QwGYSy7rFtGjMG6N-c6dLF5__9Rw

³Zacks.com November 22, 2024. https://advisor.zacksim.com/e/376582/-stock-of-the-earnings-picture/5s8v24/1098587475/h/lpAEtTBFFKn6Ol5QwGYSy7rFtGjMG6N-c6dLF5__9Rw

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

Dec 02

Love0

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

By BayTrust Financial 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.

Nov 21

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

By BayTrust Financial 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.

¹Wall 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.

Nov 18

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

By BayTrust Financial 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.

¹The 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.²Charles Schwab. 2023.

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

Oct 02

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

By BayTrust Financial 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:

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.

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

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

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