As everyone settles into their post-Labor Day routines, it’s a good time to reflect on markets and review financial plans for the rest of the year. August began with the sharpest market declines in two years, but major indices have rebounded with the S&P 500 not far off its all-time high.
The Federal Reserve is widely expected to announce its first rate cut at its September 18 meeting, which has caused interest rates to stabilize in recent weeks. Inflation remains on a downward trajectory and the broader economy remains strong. So while September is beginning with additional market uncertainty (and living up to it’s reputation as the worst month for stocks!), it’s important for investors to maintain perspective.
In particular, always be prepared for volatility, especially with possible market-moving events in the coming months. There is still uncertainty around the Fed’s full rate cut path, the upcoming presidential election, and ongoing geopolitical risks. What lessons can we learn from the past few months as we navigate these events and focus on long-term financial goals?
Markets have rebounded over the past month
First, despite recent market swings, the S&P 500, Nasdaq, and Dow have produced strong gains this year. The S&P 500 has experienced only two periods of sustained pullbacks, with the largest decline measuring 8%, below the historical average. Bonds have struggled much of this year as rates remained high, but the anticipation of Fed rate cuts has helped to boost returns more recently. So while market volatility is never pleasant, it is important not to overreact to short-term events.
The stabilization in the stock market has shifted investor focus back to fundamental factors, particularly corporate earnings. This is because the stock market tends to mirror the trajectory of corporate profits over time, which in turn rises alongside the economy. Current earnings projections are positive with an expected growth rate of 10% in 2024 and nearly 14% over the next twelve months.
Similarly, bonds have performed better, with the Bloomberg U.S. Aggregate Index gaining 4% year-to-date and 7% since its bottom in April when the 10-year Treasury yield peaked around 4.7%. The high yield bond index has risen 6.3%, the corporate bond index 3.5%, and Treasurys 2.6%, fueled by the current Goldilocks period of improving inflation and steady economic growth. Bond prices also jumped at the beginning of August as they helped to balance stock market swings. These facts emphasize the importance of maintaining portfolio diversification, especially during periods of uncertainty.
The Fed is expected to cut rates in September
Second, the Fed is expected to begin cutting rates later this month after a rapid rate hike cycle from early 2022 to mid-2023. This is primarily because inflation has continued to improve. The Fed’s preferred inflation measure, the Personal Consumption Expenditures Price Index, has decelerated to 2.5% overall and 2.6% when excluding food and energy. Similarly, the headline Consumer Price Index has fallen to only 2.9% year-over-year with the core index declining to 3.2%. While prices are still much higher for consumers than prior to the pandemic, these improvements are enough for the Fed to justify a shift in monetary policy.
Much of the market volatility experienced this year is the result of changing expectations around the Fed. The year began with investors forecasting several rate cuts due to a possible “hard landing.” Then when inflation ran hotter than anticipated in the first quarter, investors believed there would be no rate cuts this year. Now, the Fed is expected to cut rates by about one percentage point through the end of the year. Each of these turns resulted in shifts in the market. This is yet another reminder that markets can get ahead of themselves, and that it’s often better to focus on the underlying trends.
In addition, recent jobs data show that the labor market is still strong but is also softening. The latest employment report, for instance, revealed that 114,000 new jobs were added in July, well short of the 175,000 projected. Unemployment rose from 4.1% to 4.3%, overshooting expectations and reaching a level not seen since the pandemic (though still not a historically high number). In a recent speech, Fed Chair Powell discussed the downside risks to the job market, saying “we do not seek or welcome further cooling in labor market conditions.” Whereas the Fed had been primarily focused on bringing down high inflation, it is now shifting its focus to the job market.
Interest rates are adjusting to a shift in Fed policy
Finally, with Fed rate cuts approaching, market-based interest rates have adjusted as well. As the accompanying chart shows, not only have yields moved lower, especially on the short end of the curve, but the yield curve is no longer inverted. The spread between the 10-year and 2-year Treasury yields has flattened in recent days due to the expected trajectory of rates.
If these moves continue, they could have several potential implications for the economy and markets. One reason some investors expected a recession in 2024 was precisely because the yield curve experienced its sharpest inversion since the 1980s. Historically, yield curve inversions precede recessions since they typically occur later in the business cycle when the Fed has overtightened. While a recession is always possible, this time could be different since higher short-term yields were the result of inflation shocks.
While nothing is certain, lower rates could be positive for economic growth, especially in rate-sensitive areas such as real estate, technology, small caps, and more. As discussed earlier, bonds have benefited from improving rates as well, partially restoring their traditional role as portfolio diversifiers.
How we react to stock market swings is more important than the market moves themselves. The uncertainty experienced by investors during the summer is a reminder to always stay focused on the long run.
Source: Clearnomics
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
3 Lessons From the Summer’s Market Volatility
As everyone settles into their post-Labor Day routines, it’s a good time to reflect on markets and review financial plans for the rest of the year. August began with the sharpest market declines in two years, but major indices have rebounded with the S&P 500 not far off its all-time high.
The Federal Reserve is widely expected to announce its first rate cut at its September 18 meeting, which has caused interest rates to stabilize in recent weeks. Inflation remains on a downward trajectory and the broader economy remains strong. So while September is beginning with additional market uncertainty (and living up to it’s reputation as the worst month for stocks!), it’s important for investors to maintain perspective.
In particular, always be prepared for volatility, especially with possible market-moving events in the coming months. There is still uncertainty around the Fed’s full rate cut path, the upcoming presidential election, and ongoing geopolitical risks. What lessons can we learn from the past few months as we navigate these events and focus on long-term financial goals?
Markets have rebounded over the past month
First, despite recent market swings, the S&P 500, Nasdaq, and Dow have produced strong gains this year. The S&P 500 has experienced only two periods of sustained pullbacks, with the largest decline measuring 8%, below the historical average. Bonds have struggled much of this year as rates remained high, but the anticipation of Fed rate cuts has helped to boost returns more recently. So while market volatility is never pleasant, it is important not to overreact to short-term events.
The stabilization in the stock market has shifted investor focus back to fundamental factors, particularly corporate earnings. This is because the stock market tends to mirror the trajectory of corporate profits over time, which in turn rises alongside the economy. Current earnings projections are positive with an expected growth rate of 10% in 2024 and nearly 14% over the next twelve months.
Similarly, bonds have performed better, with the Bloomberg U.S. Aggregate Index gaining 4% year-to-date and 7% since its bottom in April when the 10-year Treasury yield peaked around 4.7%. The high yield bond index has risen 6.3%, the corporate bond index 3.5%, and Treasurys 2.6%, fueled by the current Goldilocks period of improving inflation and steady economic growth. Bond prices also jumped at the beginning of August as they helped to balance stock market swings. These facts emphasize the importance of maintaining portfolio diversification, especially during periods of uncertainty.
The Fed is expected to cut rates in September
Second, the Fed is expected to begin cutting rates later this month after a rapid rate hike cycle from early 2022 to mid-2023. This is primarily because inflation has continued to improve. The Fed’s preferred inflation measure, the Personal Consumption Expenditures Price Index, has decelerated to 2.5% overall and 2.6% when excluding food and energy. Similarly, the headline Consumer Price Index has fallen to only 2.9% year-over-year with the core index declining to 3.2%. While prices are still much higher for consumers than prior to the pandemic, these improvements are enough for the Fed to justify a shift in monetary policy.
Much of the market volatility experienced this year is the result of changing expectations around the Fed. The year began with investors forecasting several rate cuts due to a possible “hard landing.” Then when inflation ran hotter than anticipated in the first quarter, investors believed there would be no rate cuts this year. Now, the Fed is expected to cut rates by about one percentage point through the end of the year. Each of these turns resulted in shifts in the market. This is yet another reminder that markets can get ahead of themselves, and that it’s often better to focus on the underlying trends.
In addition, recent jobs data show that the labor market is still strong but is also softening. The latest employment report, for instance, revealed that 114,000 new jobs were added in July, well short of the 175,000 projected. Unemployment rose from 4.1% to 4.3%, overshooting expectations and reaching a level not seen since the pandemic (though still not a historically high number). In a recent speech, Fed Chair Powell discussed the downside risks to the job market, saying “we do not seek or welcome further cooling in labor market conditions.” Whereas the Fed had been primarily focused on bringing down high inflation, it is now shifting its focus to the job market.
Interest rates are adjusting to a shift in Fed policy
Finally, with Fed rate cuts approaching, market-based interest rates have adjusted as well. As the accompanying chart shows, not only have yields moved lower, especially on the short end of the curve, but the yield curve is no longer inverted. The spread between the 10-year and 2-year Treasury yields has flattened in recent days due to the expected trajectory of rates.
If these moves continue, they could have several potential implications for the economy and markets. One reason some investors expected a recession in 2024 was precisely because the yield curve experienced its sharpest inversion since the 1980s. Historically, yield curve inversions precede recessions since they typically occur later in the business cycle when the Fed has overtightened. While a recession is always possible, this time could be different since higher short-term yields were the result of inflation shocks.
While nothing is certain, lower rates could be positive for economic growth, especially in rate-sensitive areas such as real estate, technology, small caps, and more. As discussed earlier, bonds have benefited from improving rates as well, partially restoring their traditional role as portfolio diversifiers.
How we react to stock market swings is more important than the market moves themselves. The uncertainty experienced by investors during the summer is a reminder to always stay focused on the long run.
Source: Clearnomics
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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