Tom Wald, CFA®, Chief Investment Officer, Transamerica Asset Management, Inc.
In this article we review:
The recent sell-off in the global equity markets entering correction territory for major market indexes
Why we believe this correction is likely to be short term in nature and opportunistic for investors
A balanced perspective on recent economic data that has fueled the sell-off and created fears of recession
Trading activity in Japan that has led to a bear market in that country and exacerbated the global market sell-off
Why we believe upcoming Fed rate cuts are likely to be catalysts for the economy and the markets
Our equity market target prices and interest rate expectations for the year ahead
In recent days global equity markets have sold off sharply, with major indexes now officially in or near correction territory. Market corrections, defined as price declines of 10% or more, have occurred on average about once every 20 months (S&P 500®) and have come to be known as painful but expected temporary cross currents for long-term investors.
So, is that what we are experiencing now? Or is this sell-off emblematic of a recessionary turn in the economy and a bearish downward trend for stocks of higher magnitudes?
It is our assessment this recent sell-off is more along the lines of a short-term correction within a longer-term upward market cycle rather than a reversal to a classic bear market. In this regard, we offer the following perspectives:
First, let’s remember the past two years.Since the depths of the most recent bear market in October 2022, the S&P 500 experienced a better than 50% price gain through mid-July 2024. A pullback of the 10% nature after such a strong move in a relatively condensed time frame probably should not, in and of itself, be overly surprising and we believe can be viewed as similar to past corrections occurring in 2010, 2011, 2015, 2018, and 2023, all of which ultimately proved to be countertrends within a longer-term rising market.
Recent economic data viewed in context. Recent economic data driving the downturn is perhaps indicative of a slowing pace of economic growth but not a pending recession. Accelerating the fierce selling of late has been a disappointing July nonfarms payroll report (+114,000) and a weaker than expected Institute of Supply Management’s (ISM) Purchasing Managers Index (PMI) measure (46.8 versus 48.5 in June). We view these reports as disappointing but not disastrous and, to some extent, balanced out by a stronger than expected ISM Services PMI report and the Atlanta Fed’s current interim 3Q gross domestic product tracking estimate of 2.9% growth.
The Fed appears ready to cut rates. Much of the recent sell-off is also believed to stem from fear of a prospective Federal Reserve policy error in waiting too long to reduce the federal funds rate following what has now been two-and-a-half years of inflation-focused monetary policy. While fingers are now forcefully pointed at Chair Jay Powell and his colleagues for not cutting rates earlier this year, we believe there is still ample time for the Fed to act accordingly by year-end and throughout 2025. We expect quarter-point rate cuts at each of the three remaining Fed meetings this year, with more to follow thereafter, potentially acting as ongoing catalysts for the economy and the markets.
The unwinding of carry trades in Japan has thrown gas on the fire. Adding to the global volatility in recent days has been a true bear market and crash-like activity in Japan (Nikkei 225 Index -26% from July 11–August 5), driven by the large carry trade unwinding of borrowed Japanese Yen positions used to purchase perceived higher-return assets. This widely applied levered strategy was highly disrupted by the Bank of Japan’s decision to raise rates on July 31. While it remains unknown how much more of this trading activity is left to be resolved, we view the Japan sell-off as being, for the most part, not related to market fundamentals and therefore a likely buying opportunity in that region.
Corporate earnings remain solid. For the most part, the economic fears of recent weeks have yet to show up in company income statements. With consensus earnings expectations for S&P 500 net operating income at 11% growth for CY 2024 and 14% for CY 2025 (FactSet Earnings Insight), we believe it is reasonable to expect total returns on stocks for these time frames of similar magnitudes.
Our expectations for equity markets and interest rates. We are maintaining our year-end S&P 500 price targets of 5,800 for 2024 and 6,300 for 2025. We have revised our interest rate forecasts to now include three quarter-point rate cuts from the Fed for the remainder of this year, closing out 2024 with a fed funds target range of 4.50%–4.75%, followed by potentially four more reductions next year, closing out 2025 with a target range of 3.50%–3.75%. We have also reduced our yield expectation on the 10-year U.S. Treasury rate to 3.75% for the end of this year and next. All considered, we believe the environment in the year ahead will be a favorable one for equities and investment-grade bonds.
Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be appropriate for all investors.
Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index.
Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.
Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.
Growth stocks typically are particularly sensitive to market movements and may involve larger price swings because their market prices tend to reflect future expectations. Growth stocks as a group may be out of favor and underperform the overall equity market for a long period of time, for example, while the market favors “value” stocks. Value investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that an undervalued stock is actually appropriately priced.
Investments in global/international markets involve risks not associated with U.S. markets, such as currency fluctuations, adverse social and political developments, and the relatively small size and lesser liquidity of some markets. These risks may be greater in emerging markets.
The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs, or financial situation. The value of any investment may fluctuate. This information has been developed by Transamerica Asset Management, Inc. and may incorporate third-party data, text, images, and other content to be deemed reliable.
Comments and general market-related projections are based on information available at the time of writing and believed to be accurate; are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.
The 10-Year U.S. Treasury bond is a U.S. Treasury debt obligation that has a maturity of 10 years.
S&P 500® Index: An unmanaged index of 500 common stocks primarily traded on the New York Stock Exchange, weighted by market capitalization.
Transamerica Asset Management, Inc. (TAM) is an SEC-registered investment adviser that provides asset management, fund administration, and shareholder services for institutional and retail clients. The funds advised and sponsored by TAM include Transamerica Funds and Transamerica Series Trust. Transamerica Funds and Transamerica Series Trust are distributed by Transamerica Capital, Inc. (TCI), member FINRA. TAM is an indirect wholly owned subsidiary of Aegon Ltd., an international life insurance, pension, and asset management company.
