Key takeaways
Stocks were up in May after retreating in April.
Volatility in recent months continues to be a feature of today’s bull market.
Investors are keeping close watch on the timing of potential Federal Reserve interest rate cuts.
The S&P 500 gained in May, bouncing back from April’s market dip. Yet the recovery came amid significant volatility as investors weigh mixed economic signals and continue to wait out the possibility of Federal Reserve interest rate cuts. On the face of it, 2024 is following a similar path to 2023, with communication services and information technology stocks leading the rest of the market.1 Unlike last year, however, participation in this bull market is broadening out to include more S&P 500 sectors.
“Although we’ve recently seen more upside, the market has appeared somewhat fragile given the level of volatility we’ve experienced,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Markets are paying attention to some weaker economic data, like slower Gross Domestic Product Growth. The economy isn’t truly weak yet, but there is more concern.”
“Although we’ve recently seen more upside, the market has appeared somewhat fragile given the level of volatility we’ve experienced,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
A key factor affecting investor perceptions is tied to plans for Federal Reserve interest rate cuts. The Fed opened the door to rate cuts beginning late last year, but more recent economic data, including stubbornly persistent inflation, tempered expectations. “Inflation is still a critical concern, as it hasn’t managed to slow significantly in recent months,” says Haworth. “Nevertheless, markets are also concerned that if economic growth slows too significantly, Fed rate cuts won’t come along until it’s too late to prevent a recession.”
In 2022 and 2023, the Fed raised the fed funds rate eleven times, to a range of 5.25% to 5.50%, but held the line on rates since July 2023. The Fed initially projected three rate cuts in 2024,2 “But based on market expectations now, the most we’ll see in terms of 2024 rate cuts is likely to be one or two,” says Haworth.
What factors are likely to affect the stock market today and for the remainder of 2024?
In 2023, communications services, information technology and consumer discretionary stocks vastly outpaced the rest of the S&P 500.1 “What kept driving the markets to new highs were companies that are insensitive to persistently higher interest rates,” says Haworth. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.”
Information technology stocks rebounded strongly in May. “Continued investment in artificial intelligence (AI) is boosting a narrow group of companies that specifically address needs in that marketplace,” says Haworth. But other sectors that notably lagged the broader market in 2023 have made gains in 2024. These include utilities and energy stocks. Based on year-to-date performance through late April, the utilities, energy, and financials sectors are all up more than 10% for the year.1
The impact of higher interest rates is reflected at the bottom end of the scale for S&P 500 sector performance. The interest-rate sensitive real estate sector is the only S&P 500 sector in negative territory year-to-date (despite making positive gains in the month of May).
The S&P 500 index of large-cap stocks topped 5,000 for the first time in February and, after a pause in April, continues to hit new highs. And the Dow Jones Industrial Average recently topped 40,000 for the first time ever.
The environment has been less beneficial for smaller stocks. “The Fed’s interest rate policy matters meaningfully to smaller companies that likely must borrow more to fund operations and business growth,” says Haworth. “As a result, small-cap stocks are under more pressure in the current environment.”
Investors appeared to recognize this based on stock market results in 2023 and 2024, comparing the S&P 500 to the Russell MidCap Index and the Russell 2000 small-cap stock index.3
What are the keys to a sustained bull market? Three primary considerations deserve attention:
External risks can always be a concern. Current issues include the impact of global tensions highlighted by the Israel-Hamas conflict and the Russia-Ukraine war. The heated lead-up to what appears likely to be a closely contested presidential election may ultimately draw more investor attention.
“It remains a constructive stock market,” says Haworth. “Earnings are still moving in a positive direction, consumer spending has held up, and it still seems clear that at some point, a rate cut will be the Fed’s next interest rate move.” In addition, Haworth points out that a high inflation environment featuring continued economic growth tends to benefit equities.
The biggest potential concern in the current environment is valuation. “Stocks that have dominated the market in the past one year-plus may be reaching challenging valuation levels,” says Haworth. “Investors may consider diversifying with an equal-weighted S&P 500 exchange-traded fund.” Such a fund puts less emphasis on the largest stocks in the Index compared to a traditional S&P 500 fund.
Freedman encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Markets will do things at the exact opposite time you expect them to.” Freedman says investors can follow a more productive path. “Our best advice is having a plan, a programmatic approach to investing. That takes the emotion out of it.”
In the near term, says Haworth, “expect continued choppiness in the markets, and not necessarily a straight upward path for stocks in the coming months.” He says for those who still have a sense of caution about the stock market, “consider putting a portion of your portfolio to work in equities in a systematic way, such as dollar-cost averaging available cash over a series of months.”
Check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
Stocks are shares of publicly traded companies can be bought and sold. These transactions occur on exchanges and over-the-counter (OTC) marketplaces. The activity of pricing, buying and selling stocks is all activity that occurs in what is generally called “the stock market.”
Stocks frequently move up and down. Between November 2023 and mid-May 2024, the stock market moved higher (following a generally downward trend between August and October 2023), except for a modest setback in April 2024.1 The market’s strength over the bulk of that period reflected, in part, expectations of a major change in Federal Reserve (Fed) monetary policy. The Fed indicated that it may begin cutting its short-term, federal funds target rate in 2024.3 That’s a major shift from Fed policy that saw 11 consecutive rate hikes between March 2022 and July 2023, a move designed to slow what had been a surging inflation rate. “The Fed’s interest rate stance is a prime consideration for equity investors in today’s market,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Yet it appears that investors may have to wait until later in 2024 to see any Fed rate cuts.”
These three indices are frequently quoted on daily news reports reflecting daily performance of the stock market. The Dow Jones Industrial Average, perhaps the most quoted index, reflects the performance of 30 prominent stocks listed on U.S. exchanges. The Standard & Poor’s 500 tracks a broader universe of 500 large U.S. stocks. The NASDAQ Composite Index provides a measure of performance of 2,500 stocks listed on the National Association of Securities Dealers (NASD) Automated Quotations exchange. These represent small-, mid- and large-cap stocks. Investors often track these indices, particularly over time, to measure broader stock market performance.
With inflation retreating and interest rate cuts likely coming later this year, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
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