Rockbridge Institutional – October 2024 Market Review

Market Review

Here’s a snapshot of recent returns for indices representing various stock and bond markets:

Market	Trailing 3 Months	Year to  Date	Trailing  12 Months	Trailing 5   Years
US Large Cap (S&P 500)	7%	21%	37%	15%
US Small Cap (Russell 2000)	4%	10%	33%	8%
Int’l Developed (EAFE)	2%	7%	22%	6%
Emerging Markets (MSCI Index)	6%	12%	25%	4%
Short-term Bonds (Treasury 1-3 yr)	0%	4%	6%	1%
Intermediate-Term Bonds (Treasury 3-5 yr)	-1%	2%	6%	0%
Long-term Bonds (Treasury 5-7 yr)	-3%	1%	8%	-1%
Inflation (CPI)	0%	2%	2%	4%

• These numbers suggest a good period for stocks. The year-to-date and trailing month periods have been especially pleasant. I think it’s the expected growth of AI as well as falling interest rates and a positive economy that help to explain these results.
• Returns of the S&P 500 stand out. This index is heavily weighted in the stocks of just six companies (Amazon, Apple, Google, Meta [Facebook], Microsoft, and Nvidia) that are expected to participate in the growth of AI. Nvidia is up an extraordinary 170% this year. Meta is up 60%.
• China makes up more than 25% of the Emerging Markets Index and reflects the recent ups and downs of that economy.
• Bond market returns are driven by changing yields. Observed returns depend on maturity – longer maturities do better when yields fall; shorter maturities do better when yields rise.
• Inflation is generally in check. The Consumer Price Index (CPI) is running close to the Fed’s 2% goal. However, what keeps inflation in the news is that a 4% inflation rate over five years means price levels have jumped more than 20%.
• We can get a hint of what’s expected for future inflation by looking at the difference between observed and inflation-adjusted yields, which is a comfortable 2.3% for 5 yr.-bonds.

Pattern of Bond Yields

The change in the pattern of yields (Yield Curve) for several maturities are shown here – notice the twists – yields at the shorter term falling and longer-term yields rising. Since returns and prices behave inversely with changing yields, these twists explain recent bond markets. Also, the Yield Curve is generally upward sloping for bonds maturing beyond two years, which is more typical.

Yields jumped over 0.5% this month, signaling increases in the cost of capital (interest rates) as inflation expectations did not move. A rising cost of capital can have a negative impact on economic growth.

A Perspective on Recent Stock Market Results

The robust stock returns of recent periods, especially in the tech-ladened S&P 500, have led some to suggest a “correction” is ahead. There is considerable uncertainty in today’s investment landscape due to our closely contested election, wars in Ukraine and the Middle East, the impact of AI, and rising interest rates. Yet today’s prices are established in a well-functioning market and reflect what is known – the future is, of course, unknown.

In a well-functioning market prices incorporate available information. Stock prices and returns are based on continuous trading by informed buyers and sellers, both of whom make decisions on their best assessment of the future. New information drives price changes as it becomes apparent, assessments of the impact are evaluated and prices change. However, the impact could be either positive or negative.

While we may experience a correction, it will be due to unpredictable surprises. Consequently, to deal with uncertainty it’s best to maintain established commitments to a well-diversified portfolio and periodically rebalance in response to future volatility.