Previous week's weekly market wrap

2024 homestretch: Feeling grateful and prepared

• As we enter the season of celebrations and thanksgiving, it may be a well-diversified portfolio contending for a top spot on our gratitude lists. We’re feeling grateful for the wealth of solid market gains across our recommended asset classes and the health provided by broadening market leadership.
• Elevated inflation has trended downward, allowing multiple major central banks to ease monetary policies, which are becoming increasingly supportive for economic growth, labor markets and corporate profits. Last week's U.S. gross domestic product (GDP) growth estimates and personal consumption expenditure (PCE) inflation data confirmed these overall trends remain intact.
• With solid fundamentals in place and momentum’s wind in the market’s sails, well-diversified portfolios may once again leave us feeling grateful in 2025, but the ride will undoubtedly be different. Stay prepared with properly balanced portfolio allocations, a disciplined rebalancing strategy and appropriate performance expectations.
• Opportunistically, we recommend being overweight in equity investments, specifically U.S. stocks over U.S. investment-grade bonds and international equity. Consider increasing the interest rate sensitivity within fixed-income portfolios by favoring emerging-market debt over U.S high-yield bonds and shifting overweight cash positions toward intermediate- and long-term U.S. investment-grade bonds.

In each year’s homestretch, we pause to appreciate what has positively impacted our lives. When we take that step back, we often notice these meaningful moments show up in a variety of forms. Given the year that it’s been, perhaps it’s a well-diversified portfolio contending for a top spot on our gratitude lists.

As we prepare our homes and dinner tables for the season of celebrations and thanksgiving, we share four feelings of gratitude from a portfolio’s perspective, as well as steps you can take to feel well-prepared for what may lie ahead.

1. Gratitude for the boost that solid market gains have provided to well-diversified portfolios

In our view, a well-diversified portfolio should incorporate exposure to 11 different asset classes, strategically arranged according to the risk and return objectives you’re trying to achieve.

The benefits of this diversification? With asset classes likely to perform differently in different environments, it could help smooth your ride over time. What’s been great about the past year, specifically, is that all 11 are up — and with above-average gains to boot. 

The drivers? Elevated inflation has trended downward, allowing multiple major central banks to begin easing monetary policies. This, in turn, is becoming increasingly supportive for economic growth, labor markets and corporate profits.

These trends were further demonstrated in gross domestic product (GDP) and inflation data released last week. Updated estimates for third-quarter U.S. growth demonstrated the economy has held strong, growing by 2.8%, in line with previous estimates.*

The core personal consumption expenditure (PCE) price index, a favorite inflation indicator of the Federal Reserve that excludes more volatile food and energy prices, rose 2.8% year over year in October. While slightly higher than September’s 2.7% year-over-year rise, the uptick was aligned with expectations.* We believe these levels provide comfort that the broader trend remains intact, even if not in a straight path.

Relative economic resiliency and the growth prospects from tech innovations have helped U.S. equity markets hold the lead, with all three asset classes soaring over 30% higher in the past 12 months. And while international equities have lagged amid global trade policy uncertainty, softer economic prospects and a strengthening dollar, they have produced still-solid double-digit returns over the same period.

Notably, bonds have made progress climbing back from the challenging rising interest-rate environment that weighed on their returns in recent years. While their return remains negative over a 3-year horizon, investment-grade bonds have outperformed cash-like investments over the last 12 months, despite the post-election uptick in yields recently. Lower-quality bonds, however, have led the way within fixed income, given their higher interest rates and contained credit spreads – highlighting the value of diversification.

Action for investors: Stay prepared with a disciplined rebalancing strategy

As good as these positive returns feel, it’s important to consider the impact market performance may have had on your portfolio’s allocations, particularly when layering the year’s gains on top of the previous two. With stocks having meaningfully outperformed bonds in recent years, your portfolio may have drifted from your targets, increasing the risk that your portfolio will perform differently from what you expect. This is especially important to consider in portfolios that have been overweight U.S. stocks over this period. 

As the following chart shows, failing to rebalance can lead to meaningful shifts in your portfolio’s allocation over time. If you find your portfolio is misaligned, consider whether rebalancing could better prepare you for 2025. 

2. Gratitude for the year’s relatively smooth ride

Markets had their bumps in 2024: Inflation-related anxiety was on display in April. Signs of labor market weakness and growth concerns within tech stocks were among the suspects during the early August and early September market weakness. And not surprisingly, October brought the typical pre-election uptick in volatility.

However, these examples were relatively short and mild in nature. Overall, market volatility in 2024 has been largely subdued. In fact, multiple asset classes have hit numerous all-time highs during the year.

The Russell 2000 Index rose to an all-time high last Monday for the first time since 2021, while the S&P 500 has set more than 50 new all-time highs this year.* Additionally, the S&P 500 has seen only 3 daily declines of 2% or more, well below the 10-year average of nearly 9 per year.

Action for investors: Stay prepared with appropriate performance expectations 

With solid fundamentals in place and momentum’s wind in the market’s sails, well-diversified portfolios may once again leave us feeling grateful for further gains in 2025. However, the ride will undoubtedly be different. We anticipate a return to more normal levels of volatility, given the attention markets have placed on shifting global policies and their potential impact on inflation and economic growth. 

Appropriate long-term performance expectations can help you stay patient when bouts of volatility occur. This is particularly true when your portfolio’s mix between stocks and bonds is aligned with your investment strategy. 

And when these short-term pullbacks happen — which they will — view them opportunistically by adding quality investments at lower prices, with a focus on diversification. 

3. Gratitude for broadening market leadership and the health it provides to the bull market

Outperformance from U.S. stocks over the course of 2023 and into 2024 is owed in large part to the meaningful gains from a small number of tech-oriented mega-cap stocks. Their heavy weight translates into an outsized impact on the returns of popular indexes such as the S&P 500, particularly now that their recent success has resulted in historic index concentration. The top 10 companies in the S&P 500 now represent nearly 35% of the index.

More recently, however, market leadership has broadened beyond this narrow set of U.S. large-cap stocks, creating a healthier backdrop for the bull market’s momentum to continue. Following the recent rally, the financials sector has returned over 50% in 12 months, officially outpacing formerly leading technology, consumer discretionary and communications services. Industrials and utilities have also played catch-up, both rising over 30% over the same period.

Not only have a wider range of sectors produced meaningful gains, but asset class leadership has also shown signs of rotation. More broadly, U.S. small- and mid-cap stocks have led markets over a 12-month time frame, helped by their outperformance since the start of the fourth quarter. The post-election rally in these more economically sensitive asset classes has benefited portfolios with overweight allocations.

Action for investors: Stay prepared with appropriately balanced equity allocations

No single asset class index — particularly those that are historically concentrated — represents the risk and return objectives of a well-diversified portfolio. Therefore, none should be the sole benchmark for a portfolio’s design or performance. 

While we’d acknowledge there are reasons for optimism in the largest companies in the S&P 500, 2024 has proved investment opportunities exist outside these growth-style stocks. We recommend investors maintain balance in their portfolios, incorporating allocations to a variety of asset classes with exposure to multiple sectors and regions based on their long-term goals. 

4. Gratitude for an opportunistic approach to executing an investment strategy

When you’re creating an investment strategy, we recommend defining well-diversified target allocations according to your risk and return objectives — your comfort with risk, time horizon and financial goals. Use these targets as a neutral starting point when building your portfolio.

From there, we believe incorporating timely adjustments could help enhance your return potential or mitigate risks in the current market environment. But when incorporating these shorter-term market opportunities, it’s important to keep your long-term targets in sight to avoid losing focus on what you’re ultimately trying to achieve.

Action for investors: Stay prepared with our Investment Policy Committee’s opportunistic portfolio guidance

We recently adjusted our opportunistic asset allocation guidance, which represents timely recommendations across 11 asset classes based on our one- to three-year global market outlook:

• Overweight equity investments relative to strategic allocations, favoring U.S. stocks specifically. While today’s higher interest rates have increased the attractiveness of bonds, the potential for price appreciation within U.S. investment-grade bonds may be limited in the near term amid solid economic growth. Conversely, we believe momentum within U.S. stocks, which have performed well over the past year, is likely to continue in 2025, even if at a slower pace. 
  
  We expect a boost from the relative strength of the U.S. economy and corporate earnings, particularly when compared to developed international markets. A slight shift from U.S. investment-grade bonds and/or international developed-market equities toward U.S. large- and mid-cap stocks can help capture these potential cyclical benefits while upholding a level of quality within your portfolio.
   
• Favor emerging-market debt over U.S. high-yield bonds, given its higher interest rate sensitivity and attractive valuations. Reallocating from U.S. high-yield bonds toward emerging-market debt within well-diversified bond allocations can help raise the interest rate sensitivity of your portfolio. This is beneficial in this environment, in our view, especially considering emerging-market debt typically outperforms in the quarters following the first Fed rate cut. 
  
  Additionally, credit spreads within U.S. high-yield bonds are historically low, further increasing the attractiveness of the higher-quality, well-diversified emerging-market debt asset class. 
   
• Revisit the purpose of cash in your portfolio, reducing reinvestment risk where appropriate. Yields on short-term bonds and cash-like investments are likely to closely follow central bank rate cuts, highlighting the reinvestment risk of these investments. 
  
  For an investment portfolio designed for longer-term goals such as retirement, we recommend reducing overweight cash and short-term bond investment allocations, given their reinvestment risk. Reallocating toward intermediate- or long-term bond investments can help your portfolio benefit from today’s higher rates for a longer period.

Work with your Edward Jones financial advisor to incorporate these views into your portfolio. This can help keep your portfolio well-positioned in the homestretch of 2024 and into 2025.

Tom Larm, CFA, CFP®
Portfolio Strategist

Brock Weimer, CFA
Associate Analyst

^{*Source: FactSet.}

Weekly market stats

^{Source: FactSet, 11/29/2024. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *Morningstar Direct 12/1/2024.}

The week ahead

Important economic releases this week include nonfarm payrolls data and the ISM PMI's.

Review last week's weekly market update.