The U.S. stock market stabilized in September, with the Dow Jones Industrial Average up 2.5% in the past 30 days as of Sept. 24. The Federal Reserve temporarily tamed market volatility with a mid-September half-percentage-point interest rate reduction, but investors are now bracing for what promises to be a game-changing U.S. presidential election.
Few are calling for a stock market collapse. Still, the third quarter of 2024 has already seen choppy waters (especially in August and September), although the general market direction has been upward, albeit modestly, in the past month.
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What will October bring to the stock market? “Apprehension” is one term being tossed around by traders and analysts, as there is increased uncertainty about who will set the nation’s economic policy and how far the Fed might go with more interest rate cuts.
“The market looks like it may remain volatile for the rest of the year, but absent global escalation of war concerns, the U.S. markets seem to be the best equity market in the world,” says David Goone, CEO at tZERO and former chief strategy officer for Intercontinental Exchange. “While interest rates seem likely to fall as the year progresses, the U.S. equity market should still be a good place to be.”
Currently there’s a load of cash sitting on the sidelines, and if rates continue to fall, a big chunk of that money is likely to go into U.S. stocks.
“We may see a little more correction, but too much money will be looking to go into the U.S. equity markets to see it stay down for long,” Goone says. “For nervous investors, you’re better off staying the course, but perhaps not add to your stock portfolio right now.”
On the upside, inflation is moderating and the upcoming holiday shopping season is expected to be robust. That’s the good news, as the U.S. economy and the stock market aren’t out of the woods yet. Focus on these seven factors that may yet upset market stability in the coming months:
— Slowing labor market.
— Federal Reserve rate policy.
— Economic and market volatility.
— The U.S. election.
— Nervous investors.
— Government spending.
— Ongoing inflation threat.
Slowing Labor Market
Historically, the U.S. labor market has been a strong indicator of stock market health. In August, the nation’s unemployment rate stood at 4.2%, with 7.1 million unemployed Americans who wanted a job but couldn’t find one. The U.S. Bureau of Labor Statistics reported that job growth numbers for July and August were revised downward. That shows the U.S. labor market is “slowing but not breaking,” according to a recent J.P. Morgan report.
While that’s not exactly great news, the nation’s labor picture suggests few worries about a job drought, which is helpful for stocks, especially given the recent lower interest rate trajectory. However, the Conference Board’s most recent survey showed people are more concerned about the availability of jobs, and the consumer confidence index fell to 98.7 compared with a 105.6 reading in August, the largest monthly drop in three years.
“Jobs are a very important area to watch,” says Ryan P. Johnson, managing director of investments at Buckingham Advisors in Dayton, Ohio. “The Fed rate hikes affected the economy with a lag; likewise, Fed cuts could help, but with a lag.”
Federal Reserve Rate Policy
The Federal Reserve’s decision last week to cut interest rates by 50 basis points should bode well for stocks, although in doing so, the Fed isn’t exactly showing great confidence in the U.S. economy. The upside is that lower rates lead to cheaper credit, and borrowing rates that are good for business are good for the stock market, too.
Still, investors shouldn’t get too excited about rate cuts. “They’re a symptom of a weakening economy,” says Sloane Ortel, chief investment officer at Ethical Capital in Provo, Utah. “If we continue to see signs of developing weakness, we’ll continue to see rate cuts.”
Ortel expects to see a rally in some of the more interest-rate-sensitive, lower-quality companies that tend to have a lot of debt.
“Yet for most long-term investors, it’s insane to be predicating investment decisions on reading the tea leaves and trying to see what a couple of guys in Washington are going to do in the near term with interest rates,” she says. “Building portfolios is about finding fundamental economic needs addressed by good companies and owning them throughout whatever may come. That will not change because of an act of the Federal Reserve.”
Economic and Market Volatility
The larger worldview isn’t a positive one right now, not with ongoing wars in Ukraine and the Middle East, with China waiting in the wings to potentially take action against Taiwan if it moves forward with declaring its independence.
While inflation has moderated globally and in the U.S., prices on bellwether commodities like energy and manufacturing materials remain stubbornly high, leaving less cash in consumers’ pockets. That’s rarely good for the markets, which are already vexed by the upcoming U.S. elections and government spending.
“In such an environment, it’s unwise for investors to shift their portfolio around drastically,” says Kelly Ann Winget, CEO at Alternative Wealth Partners in Dallas. “That said, investors should constantly look for diversification opportunities to keep their overall portfolio robust and hedged against major volatility. Economic and market volatility won’t matter much if you have a balanced portfolio between public and privately held assets.”
The Upcoming U.S. Election
The buzz is expanding over the upcoming presidential election between Vice President Kamala Harris and former President Donald Trump, along with myriad down-ballot battles for the U.S. Senate, House of Representatives and state offices.
Currently, the markets seem to be taking a “wait and see” attitude on the election, and that’s likely a sensible strategy for investors.
“Our historical analysis of stock-market performance trends (which goes back 75 years) doesn’t show a direct link between election years and market outcomes,” says Tom Hainlin, global investment strategist at U.S. Bank. “Typically, other factors such as the state of the economy, interest rates, inflation and corporate profits have a greater bearing on stock-market performance.”
Hainlin sees the largest economic indicators like inflation and labor numbers stabilizing in the last three months of 2024, and even a big election won’t disturb that sentiment.
Nervous Investors
With the Fed significantly lowering rates, a politically charged election and consumer pricing pressures leaving more Americans with less money, you can’t blame investors for having excess angst.
Even so, panicking and rushing for the exits at the slightest sign of stock market upheaval is seldom a good move.
“When you make an active decision to sell out of the market, you have to be right twice,” says Josh Radman, a financial advisor at Presidio Advisors in Denver. “First, you have to be right that the market has peaked. And then you have to be right that the market has hit its trough and know when to buy back in.”
That scenario is a fool’s errand, Radman says. “Unfortunately, what ends up happening is that many people sell out and never buy back in,” he notes. “That is often the worst-case scenario, far worse than riding the wave of volatility.”
Plus, when you shift your asset allocation from equities to fixed income, you just trade one risk (volatility) for another. “That is, the risk you can’t generate sufficient returns to meet the needs of your portfolio,” Radman adds.
Government Spending
Perhaps the stock market’s largest risks are growth overvaluation, the U.S. national debt and the associated interest burden, some experts say.
“Politicians of all political stripes who advocate high spending and low taxes are digging us deeper into debt,” says Brian Huckstep, chief investment officer at Advyzon Investment Management in Oak Park, Illinois. Huckstep says that as low-interest-rate Treasury debt issued between 2008 and 2021 matures, every new debt auction forces the Treasury Department to roll over maturing debt into bonds with much higher interest coupon payments.
That process may take years to finish, so there’s been no immediate impact on U.S. government interest payments. “Consequently, we see politicians on both sides saying they’ll either spend more or tax less, while we also continue to have higher interest costs due to rolling off inexpensive old debt,” Huckstep says. “Eventually, the higher interest burden will crowd out more constructive government spending and generate a drag on the economy.”
Ongoing Inflation Threat
Though it has abated somewhat, higher inflation is always a market influencer, as it drives the Fed’s policy decisions. The Fed’s decision to lower rates by 50 basis points is a reflection of an easing U.S. inflation rate, which currently stands at 2.5%, a far cry from the peak 9.1% rate hit in June 2022.
Still, excessive government spending and demand shocks from lower interest rates can easily reignite inflation, although that scenario looks less likely now.
“Fed cuts usually lead to a market rise,” says Stephen Kates, a certified financial planner and analyst at RetireGuide.com and Annuity.org. “Lower rates will ease borrowing costs and lower mortgage rates, both of which will unlock more spending and investment from businesses and consumers alike.”
Investors with excess cash earning 4% to 5% on the sidelines must plan for that money. “Putting that money to work somewhere is an important project for the rest of 2024,” Kates says.
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Update 09/25/24: This story was published at an earlier date and has been updated with new information.
