November 2024 Insights

As we enter a pivotal election season, volatility in the U.S. stock and bond markets has notably increased. In October, the S&P 500 index dropped by just under 1 percent, interest rates generally rose, gold reached a new record high, and oil prices have bounced up and down depending on news out of the Middle East.

In the bond market, the yield on the 10-year U.S. Treasury dropped to 3.63 percent following a recent interest rate cut by the Federal Reserve on September 16, 2024. However, by November 1, 2024, this yield climbed to 4.37 percent, marking a 0.74 percent increase. This upward trend reflects market concerns about the significant rise in government debt and uncertainty surrounding the fiscal policies of the next administration.

U.S. federal debt as a percentage of Gross Domestic Product (GDP) now stands at over 120 percent, down from the COVID-era peak of 132 percent but still nearly double the level before the 2008 financial crisis. The annual interest expense on the roughly $36 trillion federal debt has risen to over $1.1 trillion – almost double the pre-COVID level and approaching 25 percent of annual tax receipts. In fact, this interest expense now surpasses every budget line item except Social Security.

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The Federal Reserve reduced the federal funds rate by 50 basis points (0.50%), bringing it to a range of 4.75 percent to 5.0 percent.  This action helped lift the S&P 500 index by 2.0 percent in September. Meanwhile, the yield on the 10-year Treasury Note fell to 3.81 percent, down from 3.91 percent at the end of August, and the price of West Texas Intermediate (WTI) oil dropped by more than $6, settling at approximately $68.31 per barrel by the end of the month.

In our previous update, we noted that “rising geopolitical tensions remain unresolved.”  On October 1, 2024, Iran retaliated against Israel for recent strikes in southern Lebanon, further escalating tensions in the Middle East.  Although the conflicts between Russia and Ukraine, and Israel and Hamas, have been ongoing, market desensitization should not lead to complacency.  A senior White House official also warned that a direct military attack by Iran against Israel would result in severe consequences for Iran.

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After a turbulent start to August, marked by global markets under pressure—most notably Japan’s Nikkei 225 index plunging 12.4 percent in a single day—markets managed to recover, aided by central bank intervention, and closed out the month on a positive note.  Despite the early decline, the S&P 500 index ended August with a 2.2 percent gain.

On August 1, 2024, the Dow Jones Industrial Average experienced a dramatic near-1000 point swing from intraday high to low, a volatility rarely seen in a stable market. Just days later, on August 5, 2024, a global market sell-off was triggered by Japan as the “yen carry trade” unraveled.  The catalyst was the Bank of Japan (BOJ) raising interest rates to 25 basis points (0.25%)—the highest in seventeen years—which led to a sharp move in the U.S. dollar/yen exchange rate from about 160 to 142, forcing a rapid unwinding of massive leveraged positions.

For years, many investors had borrowed large sums in yen, often at near-zero or negative interest rates, to invest in higher-yielding assets—a strategy known as the “yen carry trade.”  This approach works as long as interest rate differentials and currency exchange rates remain relatively stable.  However, when the dollar/yen exchange rate moved approximately 7 percent in a single day, these leveraged bets collapsed, forcing the unwinding of positions.

In response, the BOJ announced it would refrain from raising rates during periods of market instability, sparking a strong rally.  Despite this, the underlying issue remains: the BOJ still needs to raise interest rates.

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July saw a sharp increase in volatility, marked by significant events: an assassination attempt on Donald Trump, President Joe Biden ending his reelection campaign, and Vice President Kamala Harris becoming the de facto Democratic nominee.  Additionally, a software bug in CrowdStrike’s cybersecurity patch crippled Windows-based operating systems worldwide, leading to widespread disruptions, including flight and surgery cancellations.

Geopolitical tensions also escalated.  The price of oil rose by approximately 5 percent on July 31, 2024, following reports that Iran’s Supreme Leader, Ayatollah Ali Khamenei, had ordered retaliatory strikes against Israel in response to the missile assassination of Hamas leader Ismail Haniyeh.

During the month, the S&P 500 index experienced a sharp decline of 2.3 percent in one day, its worst since December 2022, but later recovered with a rally on July 31, closing the month up by 1.1 percent. Meanwhile, the yield on the 10-year U.S. Treasury fell below 4.0 percent on August 1, down from 4.26 percent at the end of June.

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In June, the S&P 500 index reached another new high, driven by strong corporate earnings, a decline in the yield on the 10-year U.S. Treasury Note, and continued moderation in inflation. This has led the Federal Reserve to maintain its forecast for a rate cut later this year.

The S&P 500 index rose by 3.4 percent in June, while the yield on the 10-year U.S. Treasury Note dropped to 4.36 percent from 4.51 percent at the end of May. Additionally, the price of a barrel of West Texas Intermediate Oil increased to approximately $81.54 from $80.12 the previous month, following OPEC+’s decision to extend production cuts until the end of 2025.

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Driven by solid corporate earnings, a Federal Reserve slowing its bond sales, and a decrease in interest rates, the S&P 500 index reached a new high of 5321 in May before closing at approximately 5277, marking a 4.8 percent increase for the month. However, volatility in the stock and bond markets has increased significantly. The S&P 500’s rally in May followed a 4.1 percent decline in April. Additionally, the Dow Jones Industrial Average dropped about 2000 points, or 5 percent, in eight days before rebounding with a 1.8 percent gain on the month’s last trading day.

Oil prices also fluctuated, with West Texas Intermediate crude falling from nearly $82 a barrel in late April to around $77.23 by the end of May. In the U.S. Treasury market, the yield on the 10-year Note closed at 4.20 percent in March, 4.69 percent in April, and 4.51 percent in May.

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The S&P 500 index experienced a 4.1 percent decline in April, following a ten percent rally in the first quarter of 2024, as the economic landscape became increasingly uncertain.  Slowing economic growth, rising interest rates, and escalating tensions in the Middle East, sparked by Israel’s military action against Iran, contributed to the decline.  Furthermore, the Federal Reserve’s forecast of three interest rate cuts as recently as late March have been pushed back.

The yield on the 10-year U.S. Treasury Note surged to 4.69 percent by the end of April, up from 4.20 percent at the end of March and 3.88 percent at the start of the year. This 81 basis point (0.81%) increase in just four months raises concerns about the Fed’s monetary policy, particularly given the rapid growth of U.S. government debt.

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In the first quarter of 2024, the financial markets witnessed a mixed landscape: stocks and commodities achieved milestones, while long-term U.S. Treasury bonds dipped as interest rates ticked higher. Notably, the Dow Jones Industrial Average, S&P 500, and NASDAQ Composite all recorded record highs by late March.  Concurrently, the yield on 10-year U.S. Treasury bonds escalated from 3.88 percent at year-end to 4.32 percent on the first of April.

The commodities market also displayed impressive trends.  Gold’s value reached a historic peak, trading above $2250 per ounce.  Similarly, West Texas Intermediate crude oil prices climbed to over $83 per barrel, up from around $71 at year-end.  Furthermore, cocoa futures witnessed a significant surge, soaring beyond $10,000 a ton, marking an increase of over 130 percent this year, indicating a forthcoming rise in chocolate prices.

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For the first time, the S&P 500 index rallied above the 5000 mark, closing February at roughly 5096, up 5.1 percent.  Meanwhile, the yield on the 10-year U.S. Treasury Note ticked up to 4.25 percent from 3.99 percent at the end of January and 3.88 percent at year-end.  Additionally, the price of West Texas Intermediate oil rose about 3 percent in the month to roughly $78.50 a barrel.

Inflation as measured by Core Personal Consumption Expenditures (Core PCE) – the Fed’s preferred inflation gauge – rose 0.4 percent month-over-month.  On a 3-month and 6-month annualized basis, Core PCE increased 2.6 percent and 2.5 percent, respectively.  On a year-over-year basis, Core PCE has fallen from a peak of 4.5 percent in late 2021 to 2.8 percent currently, the lowest rate since April 2021.

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