DECEMBER 2024 CLIENT NEWSLETTER
Investors Had Plenty of Reasons to Be Thankful in November
The post-election stock market rally in early November continued throughout the month as long-term interest rates also edged downward. In short, it was a good month for investors across the board. As the year draws to a close, however, some analysts are calling attention to certain warning signs of a potential market pullback. Could they be right? Before we answer that, let’s look closer at the month of November.
As I noted last month, the markets tend to do well after an election no matter who wins just because having a winner eliminates a big element of uncertainty. In this case, of course, the winner also happened to be the candidate whose stance on issues like tax cuts and deregulation is considered very market-friendly. As a result, the S&P 500 climbed by 5.73% in November while the Dow Jones Industrial Average jumped by 7.54%, giving both indexes their best monthly performance of the year, and putting the S&P up by 26% year-to-date. Meanwhile, the Nasdaq Composite had its most positive month since May, adding another 6.21%.1
Also meanwhile, long-term interest rates came down a bit during November, much as I predicted they would once the election was finally over. The interest rate on the 10-year government bond dropped from nearly 4.4% at the start of the month to just under 4.2% by December 2, giving bond investors a nice little tailwind.2
Your Portfolios
That tailwind, of course, was good for our portfolios of bonds and bond-like instruments, which is where most of you have most of your money. As you should see from your latest statements, after November our fixed-income portfolios are now up by an average of about 8% for the year. Some of you may be up by a little more and some by a little less; every portfolio is customized, of course, so it depends on your individual holdings. But remember, our target is between 5%-6% for the year, so that 8% average puts us ahead of our goal by a fair margin.
That’s not a boast, of course. We all know things can change quickly at any time – just as we all know that when you’re investing for income any gains or losses in value are largely irrelevant because your income return remains consistent either way. Still, it always feels better to see your values go up rather than down. Also, 8% is noteworthy when you consider that – big picture – long-term interest rates are close to the same level now that they were when the year started. Although the Fed has lowered short-term rates by three-quarters of a percent in recent months, long-term rates have, for a variety of reasons, remained relatively sticky by comparison.
But, again, the point is that when you’re investing for income first you always know that a “feel good” month like the one we just had might soon give way to another not-so-good month, but that ultimately it doesn’t matter because your income is secure, and your principal is protected.
As for those of you who might be wishing you had a bigger allocation in the stock market so you could enjoy more of its 26% growth, keep a couple of things in mind. First, remember that the S&P 500 is heavily affected by technology. But that’s not because of how many tech companies there are in the index, it’s because the S&P is capitalization weighted. That means bigger companies (like the so-called Magnificent 7 tech leaders) have a proportionally bigger impact on any changes in the S&P’s value. If one company is ten times bigger than another, it has ten times the impact. Not every company has a 1/500th effect. But if they did – if you equal-weighted the S&P in other words – then mathematically the market would more likely be up somewhere between 10%-15%, not 26%.
I point this out because, remember: most tech companies pay little or no dividend, which means they aren’t really suitable for an income-first portfolio. So, yes, 8% isn’t quite 10%-15%, but keep in mind you’re achieving it with a lot less risk and volatility, which is also one of the main goals of an income-first approach. Remember, too, that with a typical growth-based strategy, a 26% gain in the stock market can turn into a 26% loss very quickly, which is why most investors who are retired, or nearing retirement, decrease their stock market risk in the first place!
Warning Signs?
Now, what are the odds we could see a big reversal of fortune for the markets anytime soon? Well, as I mentioned in my opening, some market analysts are increasingly pointing to certain indicators as potential warning signs that the market may be headed for a downturn. They note, for instance, that price-to-earnings (P/E) ratios are now at a level that, historically, suggests the market could be dangerously overvalued and due for a major correction.3
Personally, I’m not ready to jump on that doomsday bandwagon myself. Yes, P/E ratios are high and should be watched closely, along with all indicators. At the same time, though, other potential risks that were facing the markets at the beginning of the year have lessened dramatically, including the threat of a nationwide regional bank crisis. In fact, the financial sector strengthened in November and could strengthen further under a Republican administration.
Of course, there are still numerous geopolitical issues that could affect the markets, and there is always the risk of “irrational exuberance”. In other words, whenever there is a great deal of optimism within and about the financial markets, it’s important not to get overly optimistic. That’s especially true now with a president coming in that some people are convinced is going to take the market all the way to the moon. Well, news flash: the market is already at least three-quarters of the way to the moon now, and there is only so much upside potential to be had!
As always, if you have any questions at all about your investments or any other issue, please call our office at any time.
Have a fantastic holiday season and a Happy New Year!
1 https://www.cnbc.com/2024/12/02/cnbc-daily-open-the-stock-market-had-a-november-to-remember-.html 2 https://tradingeconomics.com/united-states/government-bond-yield 3 https://money.usnews.com/investing/articles/will-the-stock-market-crash-risk-factors