Just a few weeks ago, the Wall Street Journal ran an article titled “Are there any stock market gains left for the fourth quarter?” Although we still are bullish for the intermediate and for the long term, we think that it is foolish to try guessing what any ensuing three-month period will do. Stocks don’t have a fixed ceiling for full-year gains. Full year returns ranged from -40.7% drop in 2008 to a 41.9% gain in 1986, using the MSCI World Index as the benchmark. Through September 30 this year, the index is ahead 16.9%. Over the past 55 years, 22 of them bested this year’s year-to-date return. Stock market returns are not serially correlated. This means that what has already happened has no bearing on what is yet to take place. We believe the bull will run until euphoria brings it to an end, as happened in March, 2000. The late Sir John Templeton quipped: "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." Also possible, some unforeseen incident such as happened on September 11, 2001. What has happened in the past will have no bearing on what takes place going forward.
So where do we stand now? We think that global stocks offer value. As worldwide markets are challenged in an environment of trade wars, higher interest rates, ongoing conflict in the Middle East, and the lingering battle between Russia and Ukraine, one thing has not changed: U.S. stocks are more expensive than global stocks. And with the run-up in stock prices since 2023, U.S. stocks are even more expensive. Consider P/E ratios. The trailing P/E ratio on the S&P 500 is 28, above the global average of 19. Yields tell a similar story. The dividend yield for the S&P 500 is 1.1%, versus the global average of 2.2%. Generally, investors are willing to pay a higher price for North American securities because of the transparency of the U.S. financial system as well as the liquidity of U.S. markets. Indeed, global returns can be volatile, given currency, security, and geopolitical risks. U.S. stocks have outperformed Europe Asia Far East (EFA) stocks over the past five years. The tide is turning a bit in 2025, as global investors respond to the uncertainty over U.S. trade policy and as global central banks lower interest rates. Year to date, global stocks are up 24% while U.S. stocks are up 15%. Given expectations for more trade-related volatility, we think diversified investors should have 15%-20% of their equity allocations in international stocks to take advantage of the value, and we have been adding global stocks to our recommendations.
Last month the Fed cut the fed-funds target rate by a quarter percentage point, as was widely expected, bringing it down to 4.00% - 4.25%. Many pundits saw this as critical for stocks and the US economy. We believe the effects are smaller than many think. Many think there will be two more cuts before year-end. In 2022 Fed guidance early that year argued for no hikes and only “transitory” inflation. However, it didn’t work out that way. The Fed embarked on a series of rate increases soon thereafter. We believe in watching what the Fed does, and not what it says.
With the September core CPI inflation rate at 0.2% and the year/year inflation at 3.0%, inflation has been tamed. Since this is above the 2.0% target, the Fed’s work is not finished.
Although more rate cuts could be fine, they are not necessary for stocks to continue to do well. There is little to suggest there is any economic trouble ahead. We expect another rate cut when the Fed meets on Wednesday, October 29. The result should be a steeper yield curve indicating solid economic growth over the intermediate term. Recall, in 2008 the Fed’s rate cuts and quantitative easing didn’t end the financial-crisis bear market. In 2001, rate cuts did nothing to stop a bear market that didn’t end until October 2002.
The Fed’s short-term rate cuts do not necessarily mean lower mortgage rates either. Maybe, but maybe not. The same has happened in Europe, where eight European Central Bank cuts haven’t meant lower long yields. The point here is not to tie your market views solely on what the Fed does. Interest rates are important, but so are many other factors such as corporate earnings and valuations.
It is about six months since Liberation Day and tariffs fears have waxed larger than their reality. The markets were spooked in April and since then stocks have scaled to new highs. Tariffs impacts have not been spread evenly. Small businesses and farmers are struggling with higher costs, as are consumers.
As we professed last Spring, tariffs are hitting the US harder than our trading partners. The strict tariffs on aluminum and steel, which are intended to “protect” American production have not boosted domestic output as US steel and aluminum production remain below their pre-pandemic averages. The more you tax something, the less you get of it. When Trump hiked steel and aluminum tariffs in his first administration, it caused the affected industries’ profits to shrink. It doesn’t look any different this time either as US steel and aluminum stocks are lagging their foreign counterparts.
However, these industries are a small slice of the economy. US primary metal manufacturing is less than 0.5% of GDP. Businesses and consumers buying from protected industries will face higher costs. Ultimately the result is weaker demand and lower growth of GDP.
The technology sector is speculative right now. Will earnings remain strong, and will AI drive an acceleration in productivity that will validate today’s lofty valuations? Employment still is growing, although weakening. Inflation remains sticky yet market sentiment has not reached euphoric levels. Only time will tell.
Market averages are all at or near the high end of historical averages, whether price-earnings, price-sales, or market cap to GDP. We recommend avoiding excessive risks, and emphasizing high-quality, dividend paying equities, and overseas exposure.
Ken Green is the Senior Vice President and Director of Investments at Marc J. Lane & Company, the investment affiliate of The Law Offices of Marc J. Lane, P.C.
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We invite you to discuss your investment strategy in confidence, Please feel free to reach out Marc Lane at 312/800-372-1040 or mlane@marcjlane.com.