Rockbridge Institutional – September 2024 Market Review

Stocks

The September quarter was good for stocks. While there was a brief bout of indiscriminate selling at the beginning of the month, this was quickly turned around by the enthusiasm for the ½% drop in the Federal Funds rate. This quarter’s returns ranged from 5% for domestic large cap stocks (S&P 500) to 9% for other stock market indices. China had been a drag on emerging market results until the recent bump in returns from its stimulus programs.

The year-to-date numbers are up nicely, as well. Positive returns of 11% across the board, except for the Tech-dominated domestic large cap market (S&P 500), which is up 22% since the first of the year.

Over the past 12 months the Consumer Price Index (CPI) was up just 2.1%, close to the Fed’s inflation goal. While not ready to declare victory, the Fed is seemingly pivoting to now worrying about a recession and unemployment. Even with it currently in check, the pain of inflation is reflected in the 20% jump in general price levels since 2020.

Bonds

With yields falling, the return for the US Treasury indices went from 3% at the short end (1-3 year maturity) to 6% at the longer end (5-7 year maturity). Over the past twelve months these returns went from 7% to over 11% at the longer term (7-10 year). The pattern of yields for several maturities is beginning to reflect a more typical shape, sloping upward beyond three-year maturities, which are consistent with a more stable interest rate environment.

Recent Results in Context

Recent market returns have been well-above past averages (often past averages are used as a proxy for expectations). The following table shows returns over the most recent 12-month and 5-year periods versus long-term averages:

The recent 12-month returns are well above 5-year results and long-term averages. Consequently, it could be argued these returns are not sustainable and future returns must fall back to averages. By the same token, the 5-year period results are not dramatically out of whack and the recent 12 month returns become a necessary catch-up. We’ll see.

Volatility and Risk

What explains changes in stock values is continuous receipt of information as well as simply noise, which means future returns are random and unpredictable – volatile. However, for markets to work traders must expect a payoff from accepting volatility. Risk is the chance that what’s expected will not be realized – it can be measured by the difference between actual results and expectations.

Of course, we can’t measure market expectations. But for markets to work, anticipated payoffs must be realized eventually, and past averages become a proxy for expectations. Risk is then measured by the difference between observations and averages.

While the recent 12 months have been good for both stocks and bonds, markets look ahead. There is considerable uncertainty today with not only the future of AI, but also from our domestic political environment, strike-induced supply chain disruptions, and crises in the Middle East. Market prices reflect this uncertainty. We can expect both positive and negative surprises and, consequently, volatility going forward.