Joe Lucey

Normal Ebb and Flow?

August began with a rough start for the equity markets but, luckily enough, quickly rebounded. September began in a similar fashion. A softening in economic data drove the initial pullback, particularly the higher-than-expected unemployment reported in July, as well as manufacturing data signaling weakening demand. This sparked renewed recession concerns. Stress in Japan’s banking sector and fears over the unwinding of the yen carry trade also played a role. However, as investors reassessed the situation, they realized that although the data was softening, not much else had changed which ultimately, prompted the market bounce back.

Corrections are part of normal market gyrations. In fact, since 1980 the S&P 500 has averaged a correction of approximately 14% each year. With the recent pullback of only around 6% from its recent high, the year’s performance so far could be considered better than normal.

July’s Tech Stock Switch-Up

July was an interesting month in the markets as the “Magnificent Seven” tech stocks, which had been driving the S&P 500 and Nasdaq higher, took a breather. There was an ensuing rotation from growth to value with stocks and sectors outside of technology leading the markets. As a result, the Russell 1000 Growth Index lost 1.7%, while the Russell 1000 Value Index gained 5.1%, and the Russell 2000 Small Cap Index gained a whopping 10.1%.

Tech stocks recovered in August and all major indices were up for the month. While the dip may have been a short-term buying opportunity, we caution those of you susceptible to the fear of missing out (FOMO) that it may be too late. It’s still unclear if July’s movements mark the start of a new trend or if there will be further follow-through – which we believe will be the case as we approach fall and the upcoming elections.

Fall’s Forecast

It is widely anticipated that the Federal Reserve will begin to cut interest rates at their next meeting in mid-September, especially after Fed Chair Jerome Powell remarked that “the time has come” during the Jackson Hole Symposium. Expectations are for a one-quarter point rate cut, but a half-point cut may be on the table depending on August’s employment report. Although rate cuts may seem like good news for the markets, they appear to be already priced in, and there’s a risk of a negative market reaction. The Fed dropping interest rates is often a result of slowing economic activity. However, lower interest rates may be a tailwind for small-cap stocks as they will benefit more from lower borrowing costs than large-caps.  

In addition to the expected rate cuts, we’re cautious about stock valuations. The S&P 500 in aggregate is trading at a high price-to-earnings level compared to historical averages, meaning the markets are expensive. While these valuations aren’t at absurd levels relative to major corrections of the past, it may become difficult to justify such high valuations going forward unless earnings grow more than expected. It wouldn’t be surprising to see the market slow down and possibly take a breather. Returns may be more muted than we’ve experienced in the past couple of years. Much of the good news, such as Fed rate cuts and strong earnings growth, has already been factored into the markets, leaving them arguably “priced to perfection.”

What That Means For Your Finances

If (when) the Fed’s rate cuts do happen, there shouldn’t be too strong of a market reaction since much is already priced in, as discussed. As short-term interest rates drop, income earned from savings accounts and other short-term fixed instruments will also fall. This is a good time to lock in higher rates while you still can. We expect the yield curve to “un-invert” and normalize, with intermediate and long-term rates remaining much the same as they are now.  

While we are cautious about the markets in the near term, we remain very bullish in the long term and continue to believe the U.S. growth story is intact. Advances in technology will continue to drive productivity and economic growth. Success in the markets is based on patience and maintaining a long-term perspective. Those who chase returns in the short term often find themselves being burned. Conversely, those who do not take enough risk may find themselves missing out.  

If you have money in savings or are concerned about the equity and bond markets, this is a good time to consider alternative strategies for generating income or providing protection. Contact us to discuss options that may be appropriate for you.

Give us a call: 952-460-3290.

When it comes to decisions about the market, many people are currently playing the waiting game. Waiting for a recession to start, waiting for the Fed to start lowering interest rates, waiting for the election to be over. As with anything in life, those whose attention is consumed by waiting on future events often overlook the opportunities and experiences right in front of them. Have you been waiting on any of the above? Here’s our analysis of what to expect while the world twiddles its thumbs.

If you’re waiting on a recession to start. . .

The S&P 500 gained over 15% in the first half of 2024, adding to the gains from 2023. Those worried about a recession or market pullback have missed out. But this rally has been different than past ones.  The gains in the S&P 500 and Nasdaq continue to be driven by just a few stocks. Current market breadth, the measure comparing stocks with gains versus those with losses, is the lowest it has been in 25 years, since before the tech bust in the early 2000s. Similarly, the performance gap between large-cap and small-cap stocks during the first half of the year is one of the largest ever.  The small-cap market, represented by the Russell 2000 Index, has gained slightly less than 2% – much less than the large-cap indices.   

Despite the momentum of the handful of stocks driving market gains, a cooling period may be on the horizon. While a major recession seems unlikely due to the absence of a significant catalyst, the narrow market breadth and the lack of strength in many stocks warrant caution. Should there be a rotation out of the mega-cap tech stocks, the indices could suffer, but this might present opportunities in other sectors.

There are certainly signs the economy is slowing with unemployment creeping higher, downward revisions to past payroll numbers, GDP readings slowing, and inflation cooling. However, none of these factors indicate a recession is imminent.

If you’re waiting on the Fed. . .

Current expectations are that if economic data continues its current path, the Federal Reserve will begin cutting interest rates at their meeting in September.  However, we would caution there is a great deal of data to be released and digested before then so, there is certainly no guarantee this will occur. Even if they begin cutting interest rates, current projections suggest a limited number of rate cuts, perhaps leading to a short rate cut cycle.  This scenario might be the one to pause upward market trajectory, as multiple rate cuts have been anticipated and priced in. For those reliant on income, this could be good news, but also indicates that inflation is expected to remain above pre-COVID levels.

If you’re waiting on the election. . .

The Presidential election in November could introduce political dynamics into the mix. As of this writing, there is some question as to who the Democratic nominee will be. While many people have concern over the election’s market impact, historically, elections tend to have very limited long-term impacts on the stock market. There might be a quick bump for a day or two after the election outcome is known, but over time, the usual fundamentals, such as corporate profitability, drive market returns. The market dislikes uncertainty, so once there is an election outcome, the market generally responds favorably, regardless of which political party is in power.

Acknowledging there are many factors outside of politics driving the markets, the best stock market returns have occurred during times when there is a division of power in Washington, D.C. with different political parties controlling the Presidency and Congress. This suggests that markets prefer when no single party has full control and our federal government’s enactment of laws and regulations is limited.

We remain cautiously optimistic about the stock market and think it will continue its upward march in the latter half of the year. However, we also warn that that future returns may not be as strong as those experienced over the past year and a half. It is important to position your portfolio accordingly so you can take advantage of opportunities while protecting yourself in order to enjoy a comfortable retirement.
When it comes to retirement planning, do not play the waiting game. There is no time better than the present to take action and put your plan in place.

Give us a call: 952-460-3290.