NEWS FLASH: IAS ACHIEVES UNPRECEDENTED 16TH CONSECUTIVE YEAR ON HULBERT INVESTMENT NEWSLETTER HONOR ROLL. READ MORE HERE...

From its April tariff-related trough to its recent peak, the S&P 500 gained more than 35%, though in recent weeks the market has faced greater resistance. The market’s move higher was powered by optimism surrounding AI, strong earnings growth, and a move to more accommodative policy by the Fed as it reduced interest rates. The more recent price action has been the result of growing concern that AI isn’t yet generating enough revenue or profits to justify the spending on infrastructure, the market’s perception that the Fed will be less aggressive with rate cuts by forgoing a rate reduction in December, and increasing scrutiny on potentially stretched valuations. 

These pressures resulted in the benchmark closing below its 50-day average for the first time in nearly five months, breaking its second-longest stretch above this line in over 25 years.

The current push and pull in the market has resulted in higher volatility, yet the S&P 500 has only effectively returned to September levels. Whether the decline from recent highs is simply a function of the market taking a breather after an impressive run or the precursor to a correction or worse remains to be seen. The year-to-date gain for the market-capitalization-weighted S&P 500 is over 13%, while the return for the equal-weighted S&P 500 has been more muted, up 5.5%. According to 3Fourteen Research, more stocks in the S&P 500 have trailed the index by 20% or more than have outperformed the index this year. Participation has been narrow, with the median stock in the S&P 500 up only slightly, a further indication of a market that continues to be driven higher mainly by mega-cap tech stocks.

A rethinking of the path forward for the Fed is also weighing on sentiment. Expectations for a Fed rate cut at its December 9-10th meeting came down from over 90% in October to essentially a coin flip. Following the Fed’s October meeting, where it lowered the Fed Funds target rate to a range of 3.75%-4.0%, Chair Powell reset expectations by indicating a December rate cut was far from a “foregone conclusion,” surprising investors. It is no coincidence the recent peak for the S&P 500 was achieved just prior to Powell’s remarks and the market has sold off since. While the Fed continues to balance the risks of stubborn inflation and weaker employment conditions, the expectation was that a softening labor market was the greater concern and that the Fed would be biased toward continued easing at its final meeting of the year. 

The labor market has clearly slowed, but elevated inflation remains a problem. The government shutdown has impacted the availability of key data and resulted in limited visibility for policymakers. The last official data before the shutdown showed the Fed’s preferred inflation measure, the core Personal Consumption Expenditures Index, which excludes food and energy, remained sticky in August, up 2.9% over the prior year and higher than the Fed’s 2% target. As government data trickles out following its reopening, visibility for the Fed will improve, helping illuminate the path forward for rates. Consumer sentiment is around historic lows and continues to reflect softness, in part pressured by the government shutdown. Consumer spending accounts for roughly two-thirds of GDP, and the question remains: can consumers remain resilient with weaker job growth and inflation that continues to run at elevated levels?

Given the host of current concerns that have weighed on equities, it is harder to count on typical seasonal strength to lift markets higher through the remainder of the year, though we remain open-minded to the possibility. Despite the recent shift in sentiment, the bull case can still be credibly made, and stocks remain not too far off their recent highs. While near-term calls are exceedingly difficult to make, owning growing, quality companies at reasonable valuations remains a sensible way to pursue long-term investment success.

In this issue, our analysts present a midsized medical device maker that is working hard to defend its market share which could lead to steady if unspectacular growth from here.

Our second selection is a property and casualty insurer that primarily writes “long-tail” business, with success that has made it the fourth fastest grower in the industry.