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Stocks are going crazy even though the market is calm

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  • Despite overall market stability, individual stocks are experiencing significant volatility in 2024.
  • High-interest rates and inflation are primary drivers of market turbulence.
  • Adopting defensive investment strategies can help mitigate risks in a volatile market.

The stock market in 2024 presents a curious case of surface calm masking underlying chaos. While major indices like the S&P 500 have shown resilience, individual stocks are experiencing significant volatility. This paradox can be attributed to several factors, including high-interest rates, inflation, and the unique dynamics of an election year.

The Illusion of Stability

The S&P 500 reached new all-time highs in March 2024, marking its best first quarter since 2019. Historically, the S&P 500 has averaged a 1.3% gain in June during U.S. election years, with strength continuing through August before cooling off in September and October. This year, the index has surged by 10% in the first five months, despite concerns over slowing economic growth and weakening consumer sentiment.

However, this overall market stability belies the turbulence experienced by individual stocks. For instance, the communications services sector has been the best-performing S&P 500 sector of 2024, led by top performers like Netflix (NFLX) and Meta Platforms (META). In contrast, value stocks have underperformed growth stocks, reversing a historical trend due to anticipated Federal Reserve rate cuts in the latter half of the year.

High-Interest Rates and Inflation

Two primary drivers of market volatility in 2024 are high-interest rates and inflation. The consumer price index (CPI) rose by 3.4% year-over-year in April, remaining above the Federal Reserve's 2% long-term target. Fed Chair Jerome Powell has acknowledged the challenges in achieving this target, indicating that current interest rates may need to be maintained longer than previously anticipated.

High-interest rates have historically favored value stocks over growth stocks. However, in 2024, growth stocks have outperformed, with the Vanguard Growth ETF (VUG) generating a total return of 14.7% year-to-date, compared to the Vanguard Value ETF (VTV) at 6.3%. This shift reflects investor expectations of a Fed pivot to rate cuts later in the year.

Election Year Dynamics

Election years often bring additional volatility to the stock market. Since 1950, the S&P 500 has performed well in the second half of election years under a first-term president, such as Joe Biden. Investors concerned about potential economic slowdowns or election-related volatility can adopt defensive strategies, such as reducing exposure to stocks and increasing cash holdings. Online savings accounts currently offer interest rates of 5% or higher, providing a safe haven for cautious investors.

First-Quarter Earnings and Market Confidence

Despite the challenging economic environment, S&P 500 companies reported better-than-expected first-quarter earnings growth of 6% year-over-year. This robust performance has bolstered market confidence, contributing to the S&P 500's 4.2% increase in May. Investors remain optimistic about the market's potential bullish continuation in June, as the S&P 500 enters a historically strong three-month stretch for stocks.

Defensive Investment Strategies

Given the current market conditions, investors may consider adopting more defensive strategies. Increasing financial flexibility by reducing exposure to volatile stocks and boosting cash holdings can help mitigate risks. Additionally, focusing on sectors that have shown resilience, such as communications services, can provide stability in a turbulent market.

The stock market in 2024 is a tale of two realities: a seemingly stable surface masking significant underlying volatility. High-interest rates, inflation, and election-year dynamics are key factors contributing to this paradox. By understanding these factors and adopting defensive investment strategies, investors can navigate the turbulent waters beneath the calm market.

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