Hello, everyone, and happy Spring! I hope the weather is as nice where you are as it is here in Arizona as I write this. Here, early in the year, I wanted to write about three things that I see impacting the economy this year and, in turn, markets. My crystal ball broke a long time ago, but I feel a handful of topics – like inflation and rates in the previous two years – will make financial headlines over and over as the year progresses. It is important to keep an eye on some of these factors, as what can make headlines is correlated with what clients may inquire about.
The expectation of rate cuts as the year progresses will be a big topic of discussion in 2024. Any time a new CPI or employment report comes out, I see articles reacting to how this will impact the potential timing of rate cuts in 2024. Using the CME Group Fed watch tool, as I write this, there is only a small chance of a rate cut during the March 20 meeting.[1] However, as you look further throughout the year, the probability of multiple cuts increases significantly. That said, monthly inflation and employment readings could delay the timing of cuts and the endpoint of the FOMC target rate. As we saw in 2022, rate changes affect valuations due to the necessity of projected future cash flows being discounted at a higher or lower rate and the higher cost of borrowing.[2]
Looking at the most recent JP Morgan Guide to the Markets Publication,[3] something jumps out on slide 10. The top ten stocks in the S&P 500 make up 33.6% of the market capitalization as of February 29, 2024. Looking at the same graph, you can see that concentration has risen since about 2016 and is near a peak now. More than in recent history, a handful of stocks have an outsized impact on the overall index. Nvidia has already been in the news in 2024 for a stock price spike.[4] Because of the weights of these stocks on the S&P, it is likely to see a real overall impact surrounding the earnings of just a handful of companies. The “Magnificent 7” stocks, made up of Apple, Alphabet, Microsoft, Nvidia, Tesla, Meta, and Amazon, hold many of those slots in the top 10 and are concentrated in the tech, consumer cyclical and communications sectors. I think we’ll continue to see these in the financial news regarding earnings and potential long-term outlook changes to the company’s prospects as they continue to make up an increasing amount of the S&P 500 index.
A lot is going on out there, more important than financial markets that I’m not qualified to talk in depth about. Also, with the 2024 election on the horizon, there are often a lot of headlines that make it seem as though markets are in for a rough go. Every two years, we seem to have an election that pundits describe as “Existential for [insert potential scary outcome here].” According to this study from Forbes Advisor, markets tend to do better the 12 months after an election cycle than the 12 months leading up.[5] Looking at the dispersion of outcomes, this doesn’t seem highly predictive, and I question the likelihood of elections being a causal factor in market performance each election year. The fear may be there for clients, but Googling “election impact on stock markets” and reading through a few of those articles may reduce some of the fear based on some of the historical data. I know in 2020 we had a little bit of that fear ourselves when looking at the potential of a contested election in the middle of a pandemic with intermittent lockdowns, waves of government spending, and uncertainty on the severity and outcome of the COVID-19 virus. As it turned out, markets held up fine during that period. As usual, staying diversified and taking a long-term view is a great response to potential short-term fear.
[1] CME FedWatch Tool. CME Group. (2024, March 15). https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
[2] McClure, B. (2022, January 26). What investors should know about interest rates. Investopedia. https://www.investopedia.com/articles/fundamental/04/061604.asp
[3] Guide to the Markets. JP Morgan Asset Management (2024, February 29). https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/
[4] Bary, E. (2024, March 13). Why Nvidia’s explosive stock gains aren’t over yet, according to BofA. MSN. https://www.msn.com/en-us/money/markets/why-nvidia-s-explosive-stock-gains-aren-t-over-yet-according-to-bofa/ar-BB1jPx6J
[5] Tretina, K. (2023, October 17). How do elections affect the stock market?. Forbes. https://www.forbes.com/advisor/investing/how-do-elections-affect-the-stock-market/
