Investment Planning

It goes without saying that the market is constantly fluctuating but changing trade policies and shifting economic data are fueling increased uncertainty. History shows that markets have weathered similar storms before – and even come out stronger. In this update, we break down the latest trade impacts, employment data, inflation trends, and what they all mean for your financial future.

Market Volatility Amid Tariff Uncertainty

Markets took a hit earlier this month as President Donald Trump’s tariffs went into effect – only to be delayed once again. This ongoing uncertainty has led to what’s been called a “tariff tantrum,” reminiscent of the “taper tantrum” in 2013, when markets panicked over the Federal Reserve’s decision to slow quantitative easing. But here’s what you should know: The S&P 500 has gained 4,000 points since 2013. Simply put, markets dislike change, and the past two years have been spectacular with little volatility. We’re now experiencing a correction as investors process trade developments in real time.

Trade Impact on GDP and Key Industries

Exports account for roughly 10% of American Gross Domestic Product (GDP), and recent shifts in trade policy have made a noticeable impact. A rush of imports in December altered the trade balance, contributing to a weaker GDP forecast for the first quarter. Industries such as agriculture and automotive could be hit hardest by tariffs. Too this month, markets reacted over the threat of 50% tariffs on Canadian steel and aluminum – double the previous 25% rate. While this increase didn’t materialize, the uncertainty surrounding trade policy creates volatility. Beyond targeting individual sectors there is heavy retaliation to tariffs imposed by would be trading partners.

Employment Data and Interest Rate Outlook

The latest jobs data also signals potential headwinds. The ADP report showed that only 77,000 new jobs were added in February, significantly below the expected 162,000. The non-farms payroll report was better but still missed the forecast. And unemployment ticked up slightly to 4.1%.

These jobs numbers, weaker GDP,  inflation, and weak consumer sentiment, have led to calls for three to four rate cuts this year instead of one to two. However, once the tariff situation stabilizes and markets regain their footing, the Fed is likely to refocus on inflation and maintain a measured approach to rate cuts. At the Federal Open Market Committee meeting the number of members who believe more than two cuts would be appropriate fell while the number of members who think less than two cuts are appropriate doubled.

Inflation Trends and Consumer Confidence

Inflation data offers a mixed picture. February’s Consumer Price Index (CPI) showed only a small increase, and over the past 12 months, the CPI has cooled from 3% to 2.8%. Meanwhile, the core inflation reading declined from 3.3% to 3.1%, the lowest since April 2021. While inflation remains elevated, it’s moving in the right direction toward the Fed’s 2% target for now, not knowing how much tariffs will affect companies and the consumer.

Consumer confidence and labor shortages will be key factors to watch in the coming months. Modest improvements in government efficiency, declining interest rates, and lower energy costs will (hopefully) help markets perform better.

Staying the Course in Uncertain Times

With a lack of extended volatility over the last couple of years, a downturn now isn’t completely unexpected. The important thing is to remain patient and ask yourself, “Will markets be lower two or three years from now?” Staying focused on long-term goals and avoiding reactionary decisions will be critical in navigating the current market. If you have questions on your portfolio, don’t hesitate to reach out: 952-460-3290.

The Election’s Market Impact

With polls indicating a very tight presidential race, investor skepticism loomed as last week’s election approached, driven largely by concerns over potential delays in confirming a clear winner. Fortunately, results came sooner than expected and with a decisive outcome. In response, markets were propelled higher. The surge in stock prices has been attributable to Donald Trump’s win, as it is believed his administration will promote pro-growth domestic policies and relatively easier regulation. However, the market rally may just as well have been a sigh of relief over a clear outcome. 

While stock performance statistics vary under different presidential administrations, much of the market’s happenings are beyond the control of any one President or Congress. Any political party taking credit for market performance tends to be oversimplified.

How The Trump Presidency May Affect Your Portfolio

So, what might a Trump presidency mean for your portfolio and financial planning? It may be too early to make precise predictions, but there are a few assumptions we can make based on his campaign.

Government spending, national debt, and tax policy come to mind as significant factors. While Trump’s administration may be perceived as pro-business, his first term revealed a tendency toward increased government spending, driving up the national debt. This has played out recently with a rise in government bond yields. U.S. Treasuries no longer carry the perceived safety they used to thanks to rapidly rising debt levels, pushing bond yields higher as investors seek compensation for added risk. Given these dynamics, in our view, bonds may not provide the most favorable returns over the next several years nor the same amount of safety or diversification in investment portfolios as they have over the past several decades. We remain very optimistic in our stock market outlook. The current bull run may slow, but we do not foresee any reason for it stopping, absent an unforeseen, large-scale event.  

Great attention should also be paid to tax policy. The tax cuts initiated during Trump’s first term in office as part of the Tax Cuts and Jobs Act of 2017 are set to expire at the end of next year. With Congress likely to be in step with the President, there’s potential for these cuts to be extended or made permanent. However, this does not mean that taxes will remain lower indefinitely. Under its current trajectory, the debt will eventually become crippling, and at some point, the bill will come due. The most probable way for the federal government to bring in more revenue is to raise taxes since spending cuts seem unlikely.

Looking Ahead

With the election now in our rear-view mirror, we turn our attention to the year ahead. The stock market has delivered strong returns throughout 2024, and we fully anticipate that stocks will maintain positive momentum, continuing to rally through year-end. The Federal Reserve’s expected interest rate cuts next year would further ease monetary policy, providing a stock market tailwind. However, if inflation rebounds—a strong possibility if government spending continues or new tariffs are imposed—the Fed may be forced to reverse course.

While the market has soared in the short time since the election, it is important to stay focused on the long term. Stock market performance tends to have a very weak correlation with which political party is in office. Instead, focus on how specific actions taken by elected leaders may impact your retirement planning and broader financial strategy. As always, to look specifically at your portfolio, and for example, how taxes and bond yields may impact it, give us a call: 952-460-3290.

The Rate Cuts and The Economic Future

The Federal Reserve finally did it—they cut interest rates for the first time in four years. Before their meeting, it was widely expected that a cut was coming, but there remained some mystery as to the cut’s size. While only a quarter-point cut was anticipated, they opted for a more aggressive half-point cut in a move similar to their inflation-combatting tactics. Pre-announcement speculation suggested that a half-point drop would signal concerns about the economy weakening—a bad sign for markets. However, the stock markets reacted oppositely, rallying sharply after the cut was announced.

Looking ahead, two more quarter-point rate cuts are currently expected in 2024 as well as a series of four quarter-point cuts in 2025. In 2026, it’s expected that two further cuts will follow.  This would bring the Fed Funds rate down to around 3%. While we don’t necessarily agree with the anticipated magnitude of the expected cuts, we can assume that they are directionally accurate – short-term rates are likely to move lower in the next year or two. 

Meanwhile, inflation remains slightly above the Fed’s 2% target, with the consumer price index and personal consumption expenditures lingering around 2.5% and continuing to trend downward. It is possible the Fed could pause rate cuts or even reverse course and raise rates if inflation happens to take hold again. However, their aggressive half-point cut suggests they feel confident that the economy is softening and lower rates are warranted.

Stock Market Snapshot

Despite indications of a slowing economy, the stock market seems virtually unstoppable and continues to provide robust returns. The S&P 500 returned over 5% in Q3 and is now up more than 20% year-to-date. We remain cautious as valuations remain stretched. Certain areas of the market look more attractive than others, depending on sector and market capitalization. We expect small caps – companies requiring loans to grow – to outperform large caps in the coming months as interest rates continue to decline.

In terms of fixed income, interest rates for terms longer than three months have already adjusted, so we don’t anticipate much further downward movement. While fixed income has posted solid returns this year, future gains may be somewhat limited. With shorter-term rates dropping, investments in money markets and T-bills will earn lower interest and therefore garner fewer “real” returns when inflation and taxes are considered. Now could be a good time to explore other options for income and safety, whether that means locking in current rates or considering alternative strategies with better potential returns.

Election Effects

Many may be concerned about how next month’s election will affect the economy, but historically elections have a limited impact on the markets. This year should be no different. The election outcome may affect different sectors, but the overall market impact is likely to be muted. However, markets dislike uncertainty, so a post-election rally could occur once the results are in.

The Bottom Line

If you are concerned about the stock market and seeking returns beyond what fixed-income investments can offer, this may be an opportune time to explore strategies participating in market upside while limiting downside impacts. Many investors have become complacent after enjoying the strong returns of the stock market since the beginning of 2023. We will caution risks abound; do not put your retirement plan in jeopardy by taking on an inappropriate amount of risk – whether it be too little or too much. Call us if you would like to review your portfolio and ensure you remain on track to enjoy a worry-free, secure retirement: 952-460-3290.

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.