The SPDR Gold Shares ETF saw a strong surge in the third quarter, fueled by growing investor optimism that the Federal Reserve could successfully achieve a “soft landing” for the U.S. economy. By the end of September, many investors appeared more confident that the Fed could lower inflation without triggering a recession. “There’s more confidence that we’re going to stick the soft landing,” said Michael Arone, chief investment strategist at State Street Global Advisors. However, Arone also noted that such outcomes are rare, and gold’s strong performance suggests that some investors are still hedging against economic risks. The SPDR Gold Shares ETF (GLD), which invests in physical gold, has soared 27.1% this year, including a 13% rise in the third quarter. This outpaced the S&P 500, which gained 5.5% during the same period and is up 20.8% for the year. September marked the start of the Fed’s interest-rate-cutting cycle, with the central bank opting for a larger-than-expected half-point reduction. This move sparked a rally in U.S. bonds, as the iShares Core U.S. Aggregate Bond ETF (AGG), which tracks investment-grade bonds, gained 5.3% in the third quarter. Meanwhile, riskier corporate bonds, like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), saw a 5.7% gain. Despite the optimism, Arone recommends maintaining a small allocation to gold as a hedge against potential risks. He suggests that long-term investors consider a 3% to 10% allocation, emphasizing that falling interest rates make gold an increasingly attractive asset. As the “opportunity cost” of holding gold declines, it remains a valuable safeguard, especially if the economic outlook shifts unexpectedly.

Investors are increasingly jittery about economic data, even reports that once flew under the radar. As the Federal Reserve works to lower interest rates and guide the economy toward a soft landing, market reactions have become more pronounced. While crucial reports like monthly job numbers still draw attention, even routine data releases now have the power to move markets. Jack Janasiewicz, a portfolio manager at Natixis Investment Managers Solutions, attributes this to investors being “hyper-sensitive” to the constant stream of news, leading to swift and sometimes exaggerated market reactions. Bespoke Investment Group analyzed 25 years of data and found that Wall Street has seen greater volatility in the last four years, especially on days when economic data is released. Before the pandemic, the S&P 500 averaged a daily move of 0.81% on such days, but that figure has risen to 0.94% since March 2020. In their analysis of 34 economic indicators, Bespoke noted that previously overlooked data points have gained importance. Releases like the University of Michigan’s consumer confidence survey, ADP private payrolls, and durable-goods orders now frequently coincide with significant market moves—often 1% or more. Prior to the pandemic, such sharp reactions were rare. Jeffrey Roach, chief economist at LPL Financial, pointed to the Labor Department’s JOLTS report as a prime example of a dataset that has become a focal point during the recent economic tightening. Once ignored, it’s now closely watched, especially as the Fed monitors labor tightness through the openings-to-unemployed ratio. Market volatility has also surged around inflation data and Federal Reserve decision days. Before the pandemic, the average daily market move on Fed-decision days was 0.88%, but this has jumped to 1.17% since 2020. Janasiewicz suggests that rising market leverage and the use of short-term options trading could be fueling these swings. Despite ongoing recession fears, recent economic reports have kept markets buoyant, with the S&P 500 and Dow Jones rallying on the back of strong data. However, Janasiewicz warns that investors remain on edge, poised to exit quickly at any hint of economic weakness, driven by the fear of getting caught in a selloff.

This raises concerns about how much longer the rally can maintain its current momentum. The S&P 500 is nearing a rare milestone: a 20% or greater rise in two consecutive calendar years. As of Tuesday’s close, the index had crossed the 20% year-to-date mark, hitting its 41st record high of the year. Although the S&P 500 saw a slight pullback by the end of Wednesday, it remains near its peak. Following the Federal Reserve’s substantial interest rate cut, many investors are hopeful the index will push higher. It’s been a long time since the market experienced consecutive years of such strong performance. The last time was in 1998, during the dot-com boom, when the index posted four straight years of 20%-plus gains, starting in 1995. Before that, stocks hadn’t seen two consecutive years of such gains since 1955, before the S&P 500 was introduced. With the S&P 500 up 60% from its October 2022 low, according to FactSet data, investors are beginning to wonder how much further large-cap U.S. stocks can rise and whether this remarkable bull market may be nearing its peak. Some have suggested shifting away from large-cap stocks in favor of small- and mid-caps or looking for bargains abroad. Others argue that large-cap stocks still offer the best potential for returns, even as valuations have climbed to historically high levels. The comparison to the dot-com era is hard to ignore. While many experts are quick to point out the differences, it’s notable that technology stocks are once again leading the charge. Information technology and communication services now represent a significant share of the S&P 500’s market value, and valuations relative to sales are even higher than they were in 1999, according to FactSet. However, today’s companies are much more profitable than they were in the late 1990s. Recently, the S&P 500’s forward price-to-earnings ratio was 21.6, lower than the 24 times earnings seen in late 1999. Some analysts caution that high valuations could set the stage for below-average returns over the next decade. But others, like those at Yardeni Research, believe that strong earnings growth and improving productivity will continue to support the market, pushing it higher through at least 2030. While tech stocks may not dominate the market as much as they did earlier in this rally, other sectors—such as financials, industrials, and utilities—have begun to play a larger role. If these lagging sectors continue to gain momentum, the broader market could sustain its upward trajectory. Historically, following a 20% return, the S&P 500 has averaged a 9% gain the following year. While the pace may slow, history suggests that the rally could still continue.