Playing The Waiting Game

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.