September is typically a dicey month for the stock market. In many years, so are the weeks before a contentious election.
But the returns that millions of investors have been seeing lately have been wonderful — far better than Wall Street projected at the end of last year.
The S&P 500 is already 20 percent higher than the Wall Street consensus for all of 2024. As a consequence, Wall Street has upgraded its outlook radically: Now that stocks have been rallying, why shouldn’t they rise further?
It’s not crazy to think this way, even in the midst of wars, catastrophic storms and vituperative political battles. Stock market momentum, in itself, is a powerful thing. When the market is rising, it often keeps going. And important factors are propitious for stocks: The Federal Reserve has made life easier for companies and investors by lowering interest rates, those companies are still churning out handsome earnings and there is no economic recession visible on the horizon.
But at some point, the tide always turns. While market meltdowns are what most people worry about, some strategists are nervous that stocks are rising too rapidly. “The risk of a melt-up has increased,” Yardeni Research, an independent financial research firm, warned clients in a note last month. Translation: The market is in danger of getting carried away.
“The question is whether exuberance is quickly turning from the rational variety to the 1990s irrational version,” Yardeni Research said. Irrational exuberance about the prospects for technology stocks in the late 1990s created a disastrous bubble, which burst in March 2000, and it took years to recover. The S&P 500 had negative returns for the next decade.
So keep this cautionary note in mind when you look at your own portfolio returns for the three months — the quarter — through September, as well as for the year so far. What you’ll see will probably be splendid. But don’t count on returns like these forever.
Key Numbers
Consider how powerful the U.S. stock market rally has been.
The S&P 500, the most widely followed U.S. stock market benchmark, rose 5.9 percent for the quarter and 22 percent since the start of the year through September, including dividends. In the 12 months through September, it returned a sizzling 34.2 percent. That’s more than triple the average annualized return of 10.5 percent since 1926.
Most people hold stocks and bonds indirectly, through mutual funds and exchange-traded funds (E.T.F.s). Average fund returns have been even better than the S&P 500’s. That’s partly because smaller company stocks outpaced the large-company S&P 500. For the quarter, international stock funds performed even better, on average, than those focused on the United States. Bond funds were less spectacular, but they did well, too.
Here are the average returns compiled at my request by Morningstar, a financial services company:
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General U.S. domestic stock funds, 6.5 percent for the quarter and 29 percent for the calendar year through September.
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U.S. taxable bond funds, 4.4 percent and 11.9 percent.
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U.S. municipal bond funds, 2.5 percent and 10.8 percent.
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International stock funds, 7.4 percent and 24.3 percent. Stock funds focused on China had an average gain of 17.2 percent for the quarter, outpacing all other regions.
The frenzy for artificial intelligence has helped propel stocks upward. Nvidia, the designer of advanced semiconductor chips that are crucial in A.I. infrastructure, has been a major beneficiary of the A.I. stock market boom.
But as I pointed out recently, Nvidia’s stock this year has been outstripped by what might seem an unlikely contender: Vistra, a utility that owns nation’s second-largest collection of nuclear reactors.
A.I. chatbots require vast infrastructure and electric power. Enormous data server farms keep advanced A.I. running. They are devouring electricity, making aging nuclear power plants — with all of their historical environmental drawbacks — appealing to some investors.
Nvidia shares gained 145 percent this year through September, compared with 208 percent for Vistra. Another utility, Constellation Energy, the largest nuclear power operator in the United States, follows close behind, with a return of 122 percent.
Constellation signed an agreement last month to provide Microsoft with electricity for 20 years from Constellation’s Three Mile Island nuclear plant in Pennsylvania — the site of the nation’s biggest nuclear disaster. Constellation plans to revive a reactor that wasn’t damaged in the 1979 disaster but that was decommissioned five years ago. Its stock has been soaring as though the company’s nuclear assets turned overnight into pure gold.
Fund investors have exploited this bonanza. Utilities funds turned in a blistering 17.4 percent return for the quarter through September. Over the 12 months through September, they had a 38.3 percent gain, not too far behind the 43.6 percent increase in communications funds, which contained prominent tech companies like Meta (Facebook), Alphabet (Google) and Netflix.
No Crystal Ball
Where the markets are heading from here is the big question, but no one has reliable answers.
As a group, the predictions of Wall Street analysts are worthless, as I’ve pointed out before. And while individual gurus — and A.I. bots — are sometimes correct, they are only guessing.
The bullish case for the U.S. stock market rests on assumptions like these: Turbocharged by A.I., corporate earnings will grow with the U.S. economy, and inflation will remain subdued. Whatever geopolitical disruptions occur won’t derail the economic expansion. And there’s momentum: Investors who had been waiting nervously on the sidelines will jump onto the bull market bandwagon, deciding belatedly that it’s time to grab profits.
But it’s easy to make a bear case, too. Unless A.I. has changed the fundamental nature of investing, which I seriously doubt, there is no compelling reason to believe that the market can keep rising indefinitely at triple its historical pace. Short bursts of outsize gains have been common throughout history. But when gargantuan rallies are extended, they are typically followed by major market declines.
Valuations in the U.S. stock market are already as high as they were in the late ’90s, before the final tech frenzy that culminated in the 2000 market bubble. If enough skeptics turn away from the market, it will fall.
Then there’s oil. The wars in the Middle East and Ukraine could cause the price of crude — and gasoline — to increase rapidly. That wouldn’t help the stock market, or incumbent Democrats, if it happens before the Nov. 5 election. Typically, the stock market manages to do well whoever wins the presidency, but not always. Is this election different? We won’t know until it’s over, and, perhaps, not until long after.
All that said, I’m not spending much time worrying about the stock market — partly because there’s so much else to worry about, both domestically and abroad. But I have another, more positive reason for being calm about the markets.
I’m a buy-and-hold investor, using broad, global stock and bond index funds for nearly all my holdings. As a result, I don’t fret much about short-term market movements.
This long-term approach gives me a certain emotional distance from the markets. Lately, rebalancing has been my main task: reducing stock funds that have swelled as the market has risen and increasing fixed-income holdings.
I’ll freely admit that I would be much better off right now if I held only stock funds this year — or, better yet, nothing but shares of Vistra, Nvidia and Constellation Energy. But that’s OK. I’m happy to have reduced the volatility of my investments. It has helped me sleep well at night.
I can’t help with guidance on where the market is heading next. But if you set up your investments properly, you may not need to know.
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