Navigating the Uncharted Waters of the 2024 Stock Market
As the 2024 election year unfolds, the stock market is poised to defy historical trends, with the S&P 500 already up 22.08% year-to-date. But what’s driving this surge, and can it be sustained?
The Yield Curve: A Key Indicator
To understand the market’s momentum, let’s dive into the world of interest rates and government bonds. The yield curve, a graphical representation of interest rates across different maturities, holds valuable insights. Our analysis suggests that if central banks stop manipulating the interest rate curve, rates would normalize to compensate for inflation.
The Inflation Conundrum
Historically, savers have been incentivized to save when interest rates exceed inflation rates. However, this hasn’t been the case since 2010. As the chart below illustrates, the 3-month interest rate has struggled to stay above the inflation rate, leading to a dearth of savings and investments.
Lessons from China
Before chasing the allure of emerging markets, let’s examine the Chinese stock market’s performance. Despite Wall Street’s enthusiasm, the MSCI China index remains below its 2007 peak, with a meager 1.3% annualized return over the past 30 years. Investing in emerging markets can be profitable, but it requires a long-term perspective, discipline, and a strong stomach for volatility.
The Psychology of Investing
The principle of loss aversion, a cornerstone of behavioral economics, reveals that investors tend to fear losses more than they crave gains. This phenomenon can lead to risk aversion, even when potential gains are substantial. As we approach the US and Canadian elections, it’s essential to remember that politics have minimal impact on the stock market over the long term.
Staying Focused Amidst the Noise
As we navigate the choppy waters of election season, it’s crucial to keep our eyes on the horizon, avoiding the distractions of short-term market fluctuations. By doing so, we can make informed investment decisions and ride out the turbulence.
Wishing you a prosperous fall season.
Alain D. Chung, CFA
Chairman and CIO, on behalf of the Claret team
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