Not an Old Bull Market
We’ve noted week after week this year why we thought stocks would likely rally and fortunately that’s what we’ve seen happen. The S&P 500 is up more than 27% in 2024, which would go down as the best election year return ever, and it has made 56 new all-time highs, among the most ever as well.
Stocks are looking at back-to-back 20% gains for the first time since the late 1990s, bringing many to worry this bull market could be about to end. Looking at the evidence, we don’t think so. This current bull market is nearly 26 months old and is now up more than 70% from the mid-October 2022 lows. But the good news for investors is that once previous bull markets got to this point there were many more years of gains left.
That’s right, going back 50 years, we found five other bull markets that had lasted at least this long and the shortest any of them lasted was five total years. Think of it like a cruise ship — once it gets moving, it can be quite hard to stop. As you can see here, not only could there be a lot of time left, but there could be more impressive gains as well.
Major Milestones All Over
The Dow recently closed above 45,000 while the S&P 500 hit 6,000 for the first time ever. We are aware as stocks go higher, these 1,000-point milestones are easier to hit, as the percentage gain needed to achieve the milestone gets smaller. Still, this year will go down in the record books as a year that saw a lot of major milestones.
The Dow hit a record eight 1,000-point milestones this year and with a few more weeks to go, more could possibly be coming. In fact, it took only seven trading days to go from 44,000 to 45,000, the second fastest 1,000-point milestone ever.
Turning to the S&P 500 and 6,000, it appears that these milestone levels can be a good sign, as stocks have never been lower six months later. We’ve discussed before that new highs tend to be bullish and these 1,000-point milestones are new highs, so strong results over the ensuing six months makes sense.
One More Bit of Good News
November was a huge month for stocks, but the big winner was small caps, with the Russell 2000 up an amazing 10.9%. Optimism over lower taxes, a stronger economy, animal spirits, and strong earnings all were likely reasons for the surge.
We found 22 other times the Russell 2000 gained at least double digits in a month and six months later it has been higher 90% of the time and a year later up a very solid 15% on average. The bottom line is strength like we just saw aren’t the hallmarks of the end of bull markets, but more likely the beginning.
The Labor Market Is in a Reasonably Good Place, but There Are Risks
The November payroll report was going to be a tricky one to parse because of a bounce back from hurricane effects (which pulled down October payrolls) and the resolution of the strike at Boeing. The economy created 227,000 jobs in November, close to expectations, which somewhat made up for the low 36,000 number in October (revised up from 12,000). This is why we always recommend taking a 3-month average to get the overall picture, and right now, that’s sitting at a very healthy 173,000. For reference, the 2019 average was 166,000.
One of the more encouraging parts of the labor market, and really for the economy, is that construction employment is running solid. It was strong even in 2022 and 2023, which was another clue that a recession wasn’t imminent. Historically, construction employment has foreshadowed further weakness across the labor market (and recessions), which makes sense because elevated interest rates (and tight monetary policy) has preceded past recessions. If housing remains weak due to elevated rates, we could see construction employment start to pull back. For now, construction employment is rising at a very healthy 2.6% year-over-year pace, spurred by building construction (residential, but also non-residential like manufacturing facilities) and even home improvements. However, this is something we’re going to be watching very carefully as 2025 progresses.
It’s Not All Rosy
Despite the healthy look on the payroll side, which comes from the government’s survey of businesses, things are less than picture perfect when you look at the household survey. For one thing the unemployment rate rose to 4.2%, just shy of the highest rate we’ve seen over the last two years. A year ago, it was 3.7%. The prime-age (25-54) employment-population ratio, which is a way of controlling for demographic effects and labor force participation issues, has fallen to 80.4%. That’s still close to the highest we saw during the 2010s expansion, and above anything we saw in the mid-2000s, but it’s fallen quite a bit from the recent peak of 80.9%. These levels are not a bad place to be if things can hold at this level, but it’s the trend that’s concerning.
The other aspect that is concerning is that overall hiring has slowed, a lot. Hires fell to 5.3 million in October, well below the 5.5-6 million level we saw in 2018-2019. Keep in mind that the labor force is also larger. The hiring rate, which normalizes hires by the size of the labor force, has fallen to 3.3%. That’s the lowest pace since early 2013 (outside of the Covid months). Again, it’s the trend that’s a concern here.
You may be wondering, “Wait, if hiring is weak, why are monthly payrolls growing at a healthy pace?” The answer is that hires measure “gross hiring,” whereas payrolls measure hires net of separations (including quits and layoffs). Quits have been in a general downtrend, which also highlights the fact that hiring has slowed (people tend to quit their jobs at a higher rate only if it’s easy to find a job). At the same time, layoffs remain really low, and that’s been the datapoint that’s been consistently positive as far as the labor market is concerned. Overall layoffs are clocking in around 1.6 million a month, well below the 1.8-2.0 million level we saw in 2018-2019. Again, the labor force is much larger, and if you normalize for that, the layoff rate is currently at 1%. That’s well below the pre-pandemic range of 1.2-1.3%.
The big picture is that the employers are very reluctant to lay off workers right now, but hiring has slowed. So if you have a job, or are casually looking for a better opportunity (while being employed), it’s not a bad labor market environment. But if you’re unemployed, it’s harder to find a job than it was a year ago (let alone two years ago).
What Ultimately Matters Is Income Growth and That’s Looking Good
It’s useful to recall that consumption accounts for close to 70% of the economy. Consumption has been driven by income growth this cycle, and right now aggregate income growth (across all workers in the economy) is running at a 5.8% annualized pace over the last three months. That’s above the strong pre-pandemic pace of 4.8%. There’s no reason to expect this to pull back significantly, but we may see a shift in dynamics. Aggregate income growth is the sum of employment growth, wage growth, and change in hours worked. Going forward, aggregate income growth is more likely to be powered by strong wage growth, even as employment growth slows to a 150,000-175,000 average monthly pace. Over the last three months, wage growth has run at an annualized pace of 4.5%.
Another reason for optimism is that we expect headline inflation to remain muted (close to the Fed’s target of 2%), in no small part due to easing energy and food prices. That means real wage growth is likely to remain strong, supporting consumption.
The Big Question: What Does the Fed Do?
Given the current picture of the labor market — a healthy level overall, with some worrying downtrends — the Fed is likely on track to cut rates at their December meeting. Investors are currently pricing an 87% probability of that outcome.
But we’re going to face some uncertainty in 2025, for two reasons. As long as the unemployment rate doesn’t move much higher and stays below the Fed’s own projection of 4.4% (for 2024 and 2025), they’re going to take it as a positive, i.e. less risk to their employment mandate. However, for idiosyncratic reasons (housing and stock prices), inflation could stay elevated over the next few months, pushing the Fed to pause on rate cuts.
The risk is that the Fed takes an extended pause, even as rates stay on the higher side and adversely impact cyclical areas of the economy like housing, manufacturing, and business investment. That doesn’t mean a recession is likely, but it’s a scenario where we get more volatility as the economy navigates monetary policy that is tighter than it needs to be.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Compliance Case # 02542778_120924_C
