Highlights
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The U.S. economy continued to expand in the second quarter.
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Stocks overcame a weak start to the month and finished in positive territory.
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The Federal Reserve initiated their first rate cut, leading to decline in rates during the month.
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October Surprises & the stock marrket.
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Economic Update
Growth
Gross Domestic Product (GDP), which measures the overall growth of the economy, grew at an annualized rate of 3.0% in the second quarter of 2024. The latest data release is the final reading for Q2 2024, which remains unchanged from the previous estimate. For the first half of 2024, the economy expanded at a rate of 2.3%—a solid pace, though lower than the 3.8% growth seen in the second half of 2023.
Additionally, the Commerce Department revised GDP growth upward in its annual revision for prior years. According to the release, growth was revised higher for 2021, 2022, and 2023. For the period from the second quarter of 2020 through the first quarter of this year, GDP grew at an annual rate of 5.2%, 0.3% higher than previously estimated.
Stocks and Bonds
Despite looking as if September was going to be a rough month for the market, stocks overcame an ugly first week and posted a gain to finish the third quarter. The broad S&P 500 index went on to set an additional five new closing highs in September, bringing the total to 43 year-to-date, and closed with a 2.1% gain. The index notched its best first nine months of a year since 1997.
The Dow also delivered during the month, setting seven new closing highs (33 YTD) and closed with a 2.0% gain. The index now sits above 42,000 for the first time in history (42,330.15 as of 9/30/24). The Tech-heavy Nasdaq added 2.8% for September.
Emerging Markets experienced a sudden awakening during the month. The index rose 6.7% and was a beneficiary of China’s efforts to stimulate their economy.
On the other side of the scale, mid-cap, developed foreign, and small-cap stocks all managed to eke out a smaller gain for the month.
Eight of 11 sectors were up for the month. Consumer Discretionary and Utilities led with gains of 7.3% and 6.6%, respectively. Over the past year, Utilities have been the best performing sector, returning nearly 42%.
Financials, Health Care, and Energy were the three sectors that finished in negative territory for the month. Lower oil prices weighed on Energy stocks, which has also placed them in last place among all the sectors over the past year.
Treasury yields fell across the curve. Shorter duration yields moved in lockstep with the Fed’s half a percentage point rate cut with the 1-, 3- and 6-month T-Bill yields all down about 0.50%. Further out on the yield curve the declines were less steep. The yield on the 2-year treasury was down 0.25% while the 10- and 30-year were down 0.10% and 0.06%, respectively.
Fixed income returns continue to be positively impacted by falling rates. For the month, fixed income rose between 0.9% and 1.7%. Returns over the past year have ranged from 8.1% for shorter-term bonds to 13.8% for the Bloomberg US Credit Index.
October Surprise?
The term “October Surprise” is most often associated with presidential elections. It refers to some sort of significant political event or development that occurs in the weeks leading up to the U.S. presidential election in November. Often, these surprises are catalysts that act to shift public opinion in the lead-up to election day.
Another form of “October Surprise” can also be associated with the stock market. Looking back through history, the month of October has a reputation for being the month most often associated with significant “surprises” that acted to rapidly shift sentiment, leading to heightened market volatility amid the dramatic events. The following is a short list of events that shaped this reputation:
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- The Panic of 1907 – In October 1907, a financial crisis unfolded due to a collapse in the U.S. banking system, triggering widespread panic. The stock market declined around 50% from its peak earlier that year. This event exposed the vulnerabilities of the banking system and eventually led to the creation of the Federal Reserve in 1913.
- The Crash of ‘29 (1929) – Perhaps the most infamous October event, the Crash of ‘29 marked the onset of the Great Depression. Mostly associated with Black Thursday on October 24th of that year and Black Tuesday on October 29th. A frenzy of panic selling wiped out billions of dollars in market value, plunging the market into a decade-long downturn.
- Black Monday (1987) – On October 19, 1987, the Dow Jones Industrial Average suffered its largest one-day percentage drop, falling 22.6%. This event, known as Black Monday, reverberated throughout global markets, and while the exact cause remains debated, computerized trading and overvaluation are often cited as key contributors.
- October 2008 – Amid the global financial crisis, October 2008 saw severe stock market declines as fears of a worldwide economic collapse grew. Following the collapse of Lehman Brothers and the bailout of other major financial institutions, market volatility surged.
- October 2018 – More recently, in October 2018, global stock markets experienced sharp declines driven by concerns over rising interest rates, trade tensions between the U.S. and China, and signs of slowing global growth.
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So, if October is such a notorious month should we reverse course and change investment strategy?
To answer the question, let’s rewind the clock to October of last year. As we wrote in the monthly market update for that month, stocks had declined for three consecutive months and at the lows for the month the S&P 500 was in correction territory with a decline of 10.28% of the high reached in July of 2023.
What’s happened since then?
As it turns out, stocks bottomed on October 27th and began a run that has been largely uninterrupted since. The “October Surprise” ended up being a 40%+ return on the S&P 500 from that point through the end of September.
In our upcoming quarterly client letter, we share that our affection for stocks is currently at “Like.” (For reference our ranking from low to high is: “Like,” “Really Like,” and “Love.”) Note that none of our rankings present a desire to shy away from owning stocks. We are long-term investors and firmly believe that stocks will provide our clients with the best opportunity to compound and grow their wealth over the long run.
As last year’s October decline demonstrated, markets can recover swiftly, and those who stay the course are often rewarded with strong returns. Our current outlook reflects this confidence. While we like stocks we are also cognizant of the fact that the odds of another 40% run may not be what they were a year ago. Despite that, we encourage clients to remain fully invested in a manner aligns with their long-term financial goals.
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Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
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