Even as December limped to a close - no Santa Claus rally in sight - the fervor surrounding artificial intelligence (AI) left its mark in 2024, powering significant gains in the S&P 500 and Nasdaq.

​Further stoking the fire: the Federal Reserve cutting interest rates on three separate occasions in the latter half of the year. Stocks also rallied sharply following Trump's win in November, as traders factored in the expectation for lower taxes and a looser regulatory approach under a Republican administration.

The S&P 500 ended 2024 with an annual gain of about 23% after rising by 24% in 2023, marking the first time since 1997 and 1998 that the index has closed with back-to-back gains of above 20%.
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Those are the headlines for the year. But there’s more to a market than headlines. Let’s get some perspective. 

And the clear winner is… the U.S. stock market.
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The U.S. Presidential elections left the country divided between grief and elation. But the stock market, that cold, calculating, emotionless creature, powered to new heights partly on relief that the election result was quick and orderly, and partly on the hope of reduced regulations and a more favorable business climate from an incoming Trump administration.

​That’s the hope. Reality, on the other hand, may prove more complicated.  
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Reality: One Example.

​When the President-elect announced at month’s end his intentions to impose steep tariffs on Mexico, Canada and China on his first day in office, shares of U.S. and European automakers took an immediate hit; GM falling 9% the next day. 

​October started out surprisingly strong, with the market roaring into mid-month. Then the chop began, and the downslide.

​As I write, the S&P 500 is rapidly heading back to the flat line for the month. Most of the strategies suffered as well, largely attributable to a failing bond hedge. 

​The Surge in Treasury Yields

Since the Federal Reserve cut short-term rates by half a percentage point on September 19, the 10-year Treasury yield has gone from 3.6% to 4.2%.  Bond funds have an inverse relationship to yields. Case in point: TLT, the 20-year Treasury Bond ETF. Since that Fed rate cut, TLT has dropped 7%. That was not something the market was expecting, and most of our strategies were on the wrong side of that trade.

It was a rocky start to September. Nvidia plunged 9% on the very first trading day of the month. Roping in the last week of August, investors dumped stocks at their fastest pace since November 2020. Selling was led by institutional investors and hedge funds. Although to be fair, ETFs saw unusually high inflows throughout August.
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Why the selloff in stocks? The latest economic data – especially regarding the labor market - implied slowing growth for the U.S. economy. Fears reemerged that the Fed was behind the curve and the U.S. was heading for a recession. That’s right – recession. The boogeyman that refuses to die and haunts and taunts investors until sleep is elusive and portfolios can only be opened in the company of a stiff drink. 

The selling started on day one. On day three, a weakening U.S. jobs market sparked concerns over a possible recession, and a popular hedge fund trade linked to the Japanese yen blew up. The S&P 500 lost 3% and the Dow plunged more than 1,000 points - its worst sell-off in two years.

​Within the first three trading days of August, the Nasdaq had entered correction mode (down 10%). Apple was down 12%. Tech bellwether Nvidia was crashing more than 20%.

The roller coaster train had disengaged from the lift and down we were going, gravity at its most terrifying. 

​This has been painful.

​Before today, the Nasdaq was down -9.0% from its most recent high – just 15 days ago. The S&P 500 down -4.0% over the same two weeks. But for American Muscle, no strategy got out of July unscathed. What went wrong? 

The Great Rotation

One major U.S. index that was not struggling in July was the Russell 2000. It’s a market index composed of 2,000 smaller U.S. companies, and so far in July, the Russell 2000 has outperformed the Nasdaq by 12.8 percentage points. It’s on pace for its largest monthly lead since February 2001.

When the year began, analysts were tripping over themselves to predict a market slowdown from 2023's strong pace, with the consensus seeing the S&P 500 gaining only 8% to 9% for all of 2024.

So far, bad prediction – at least at the index level. With the first 6 months of 2024 under its belt, the S&P 500 is up 14% and change; the NASDAQ up a little further.
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But pull back the covers a bit, and the analysts are not that far off the mark. For example, the S&P 500 equal-weight index is up a more modest 3.82% for the year. What’s that, and why does it matter?  

Wall Street is on track to end May's trading month on a strong note. Softer inflation data earlier this month and better-than-expected quarterly earnings reports lifted investor sentiment and helped erase much of April’s ugliness.
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Of special note: Nvidia’s quarterly earnings, reported after the close on May 22. Investors had been on pins and needles in the days leading up to the report.

​Nvidia – the company spearheading the AI boom - has become the 800-pound gorilla of the market. 

Remember way back when (last month, to be exact) I mentioned that April is - statistically - the best month of the year on average for S&P 500 returns?

Well, not this time.
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Stocks are headed for their first losing month since October. The 30-stock Dow Jones Industrial Average is on pace for a more than 5% loss in April. The S&P 500 and Nasdaq Composite are headed for declines of more than 4% each.

Half the talk on Wall Street is about how the S&P 500 is up five straight months. The other half revolves around the question: when is the correction coming?

Since October of 2023, stocks have climbed the wall of worry and closed each month in the green. Blinders on, the market has managed to ignore vacillating inflation numbers, threats of recession, Fed speak, Fed silence, and the tea leaves of corporate earnings.

Most recently, advances were fueled by the Fed's latest remarks that maintained the central bank’s rate-cutting timeline for the year, as well as investors' ongoing enthusiasm for tech stocks amid the AI-powered rally. Overall investor sentiment remains above its historical average, reflecting persistent market optimism.