How is the stock market faring, and what can we expect in Q4 2024? An analysis based on BlackRock’s quarterly report
BlackRock’s latest quarterly report on the stock market opens with a thought-provoking quote from Tony DeSpirito, the Global Chief Investment Officer: “The economy is not the stock market. And that’s good news.” This line suggests that the stock market may not necessarily follow suit even if the real economy slows down. Here, we break down BlackRock’s outlook for the stock market over the final quarter of 2024.
Stock Market: General Observations
The fourth quarter of 2024 promises to be a dynamic period for both the stock market and cryptocurrencies. BlackRock analysts predict that risk assets may experience heightened volatility, driven primarily by the upcoming U.S. elections and central banks’ potential rate cuts, especially by the Federal Reserve (Fed). Overall, BlackRock’s experts anticipate that rate cuts could bolster the stock market and create fresh investment opportunities.
However, the third quarter of 2024 was also marked by significant volatility, largely due to concerns over economic deceleration and recession risks. The Fed’s seemingly delayed response to these issues has added to market uncertainties. Despite these challenges, BlackRock’s report underscores that the fundamentals of the stock market have remained strong.
Two Sides of Volatility
The report delves into the topic of volatility, a critical factor in understanding the stock market’s outlook for the months ahead. BlackRock’s analysts remind us that while investor sentiment can move markets in the short term, fundamentals ultimately prevail over time. Investors should therefore stay focused on long-term value creation, even if the coming months bring sharp price swings.
Tony DeSpirito elaborates on the benefits of volatility with four key insights:
- Volatility can be advantageous: Market corrections allow investors to increase their exposure to high-quality assets, particularly when these price drops stem from sentiment-driven events that don’t alter the asset’s underlying fundamentals. By taking advantage of dips, investors may strengthen their portfolios.
- Volatility is normal: The stock market has always relied on its ups and downs to recover from major downturns, such as the 2008 financial crisis. BlackRock expects a similar scenario in the coming months, with peaks in volatility likely due to the Fed’s decisions.
- Market corrections are common: Over the past 35 years, the S&P 500 has experienced 20 corrections of over 10%, yet it has delivered an average annual return of +14%. The takeaway is clear: investing with a long-term perspective can help investors ride out market fluctuations effectively.
- Higher volatility can yield better returns: BlackRock’s data show that periods of increased volatility often lead to superior returns when the Volatility Index (VIX) remains below 12 points and six-month returns for the S&P 500 average around 5%. However, when the VIX hits 29 or higher, these returns jump to 16%. In short, volatility can drive short-term returns.
U.S. Elections and Their Impact on the Stock Market
The November U.S. elections are another major event that could influence the stock market this quarter. BlackRock has analysed how previous elections have affected stock performance, concluding that while election results often cause immediate price swings, the longer-term effects tend to be muted. Since 1996, only two out of seven elections have triggered post-election volatility lasting more than eleven months.
BlackRock’s message is clear: even during times of political uncertainty, investors should maintain a long-term view. History shows that the market has overcome many challenges since 1974, from presidential resignations to stagflation, the 1987 crash, the dot-com bubble, the 2008 crisis, and COVID-19. Patience, it seems, remains an invaluable virtue in the world of investing.
The Impact of Fed Rate Cuts
BlackRock’s report also explores the potential impact of Fed rate cuts on the stock market. The analysis confirms that stock markets tend to perform well when rates are reduced, especially if these cuts do not coincide with a recession. Historically, large-cap stocks have typically outperformed smaller-cap stocks for up to three years following the first rate cut.
When broken down by sector, the report shows that healthcare and consumer goods stocks tend to experience above-average growth in the year following an initial rate cut. This insight could benefit investors seeking defensive exposure in an uncertain environment.
And What About the Crypto Market?
In recent months, BlackRock and its CEO, Larry Fink, have shown a growing interest in cryptocurrency. BlackRock’s latest report highlights Bitcoin’s unique potential as a portfolio diversifier. Unlike traditional stock market assets, Bitcoin is largely uncorrelated with equities, which can provide additional resilience to a portfolio. Bitcoin’s rallies tend to be more explosive, offering investors a high-growth asset option with its own distinctive cycle.
Thanks to its secure, immutable blockchain technology, Bitcoin is viewed as a reliable store of value. Its Proof of Work system ensures that thousands of nodes and miners verify each transaction, providing unmatched security. This immutability and transparency set Bitcoin apart, cementing its position as a unique alternative asset for long-term investors.
Conclusion
The fourth quarter of 2024 presents both challenges and opportunities for the stock market. Investors can expect volatility to continue with the upcoming U.S. elections, potential rate cuts by the Fed, and ongoing global economic shifts. However, BlackRock’s analysis suggests that a long-term perspective and focus on fundamentals can help investors make the most of these market conditions.
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