5 Insights on the Fed, Election, and Volatility in Q4 2024
As we begin the final quarter of the year, financial markets and the economy have defied the expectations of many investors. Rather than falling into recession, the economy has grown steadily, albeit at a slower pace, and inflation rates have fallen toward the Fed’s target.
As a result, the macroeconomic environment has shifted to a monetary easing cycle, propelling the S&P 500 and Dow Jones Industrial Average to new all-time highs and boosting bond returns. The first three quarters of the year are a reminder that it’s often best to focus on the longer-term trends rather than events in the rearview mirror.
Of course, there are still many risks in the months ahead. The path of Fed policy is uncertain, and investors are already debating the size of the next rate cut. The presidential election is still close and there are wide-ranging implications for tax policy, regulation, trade, and more. Geopolitical conflicts are worsening with possible implications for global stability, supply chains, and oil prices. Market swings are always possible, especially with valuations and earnings expectations at heightened levels.
The reality, however, is that facing risks is unavoidable when it comes to investing and planning for the future. How we choose to react to those risks is ultimately what determines investment and financial success. Rather than trying to time the market to avoid these risks, it’s far better to hold a portfolio that can weather different market environments.
Below, we provide 5 Insights on the Fed, Election, and Volatility in Q4 2024, and how they might affect markets as we enter the final stretch of the year.
1. The market achieves many new all-time highs during bull markets
First, the market has experienced many new all-time highs this year, including during this past quarter. While this performance is encouraging, it can also create unease among investors who worry that we may be “due for a pullback.”
During bull markets, stock indices have historically reached many new all-time highs, as shown in the accompanying chart. This is almost by definition and is a result of sustained earnings, economic growth, and improving investor sentiment. New all-time highs have not been a reliable predictor of market pullbacks since it’s the underlying market and economic trends that matter. Attempting to time the market based only on index levels often proves counter-productive for this reason.
Of course, market fluctuations are an unavoidable part of investing, and a decline will inevitably occur at some point. However, predicting the timing of such declines is not only challenging, but markets have historically made both higher highs and higher lows. For example, the pullbacks that occurred in April and August this year are a reminder that the market can sometimes recover faster than many investors expect. While the past is no guarantee of the future, it is often better to simply stay invested than to try to jump in and out of markets.
2. The market has performed well under both political parties
Second, many investors are concerned about the potential impact of the presidential election on the economy. According to polling data from the Pew Research Center, eight out of ten registered voters say the economy is very important to their vote in the presidential election. As the race intensifies, it’s crucial to remember that while elections are important for the country and as citizens, it’s important not to vote with our portfolios and savings.
History shows that the stock market has experienced long-term growth under both major political parties, as seen in the accompanying chart. It is not the case that the market or economy crashes when one political party is in office. This is because the underlying drivers of market performance – economic cycles, earnings, valuations, etc. – are far more important than who occupies the White House.
That said, policies can certainly affect taxes, trade, industrial policy, regulatory frameworks, and more. However, policy shifts often occur gradually, and their timing and impacts are frequently overestimated. What politicians promise is often different from what is ultimately enacted. Thus, investors should focus on long-term economic and market trends rather than daily poll results. I know this is tough sometimes, especially given the heated political environment, but letting emotions dictate portfolio moves can be detrimental in the long run.
3. The Fed is expected to cut rates further
Third, inflation continues to moderate, with the most recent data showing the PCE price index, the Fed’s preferred inflation measure, increasing just 2.2% from a year earlier, approaching the Fed’s target rate of 2%. Meanwhile, the labor market shows continued signs of slowing with unemployment at 4.2%, although this is still low by historical standards.
These economic conditions set the stage for the Fed’s first 50 basis point reduction in interest rates in September, with more cuts expected through the rest of the year and in 2025. The market has been anticipating cuts of various sizes all year and rallied in the days following the announcement.
Historical rate cuts are difficult to analyze because why the Fed cuts rates is more important than when or by how much. The Fed has typically cut rates during economic and financial crises, such as in 2008 or 2020. These are times when the economy and market are expected to struggle for extended periods.
In contrast, the current situation is one of achieving balance or a so-called “soft landing,” just as the Fed did in the mid-1990s. The Fed’s rapid rate hikes in 1994 were followed by cuts in 1995 once inflation fears faded. This then paved the way for a long economic expansion and bull market. While this is only one example, it is important to draw the correct historical parallels when it comes to Fed policy.
4. The fixed income landscape is shifting
Fed rate cuts have resulted in lower interest rates across maturities, as well as a “disinversion” of the yield curve. This is sometimes referred to as a “bull steepener” since it can be positive for bonds. In many ways, this is a reversal of the bear market in bonds experienced in 2022 when rates were on the way up.
Bond prices move in the opposite direction of interest rates. This is because already-issued bonds with higher rates become more valuable as market rates fall. Thus, bondholders today not only benefit from higher-than-average yields, but could experience price appreciation if rates continue to trend lower.
For the economy, lower rates improve borrowing costs for corporations and individuals, potentially boosting economic expansion and investment prospects. This can be positive for economic growth which then translates into better earnings and corporate fundamentals. Thus, despite the challenges bonds have faced in the past few years, it’s important to maintain balance across asset classes.
5. Geopolitical conflicts are worrisome but do not directly impact markets
Finally, tensions have risen in the Middle East as the conflict between Israel and Hezbollah has intensified. This adds to global geopolitical tensions including the ongoing war between Russia and Ukraine. While these events have major real-world impacts, their effects on the economy and stock market are less clear cut, and any impact on investors’ portfolios is typically fleeting. As the accompanying chart shows, periods with prolonged market downturns often coincided with major market events such as the dot-com crash or the 2022 rate hikes.
One channel through which regional conflicts can impact the broader economy is oil prices. The escalation in the Middle East has caused a slight rise in oil prices, but the increase is modest compared to previous crises, and the U.S.’s position as the world’s largest oil and gas producer may provide some insulation from global events.
Despite geopolitical uncertainties, the stock market has experienced only two 5% or worse pullbacks this year, emphasizing the importance of staying invested and focusing on broader market trends rather than reacting to headlines.
With the Fed cutting rates, the election on the horizon, and markets near all-time highs, it is more important than ever to stay focused on long-term financial goals rather than short-term events.
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 may contain 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 or Blog 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
5 Insights on the Fed, Election, and Volatility in Q4 2024
5 Insights on the Fed, Election, and Volatility in Q4 2024
As we begin the final quarter of the year, financial markets and the economy have defied the expectations of many investors. Rather than falling into recession, the economy has grown steadily, albeit at a slower pace, and inflation rates have fallen toward the Fed’s target.
As a result, the macroeconomic environment has shifted to a monetary easing cycle, propelling the S&P 500 and Dow Jones Industrial Average to new all-time highs and boosting bond returns. The first three quarters of the year are a reminder that it’s often best to focus on the longer-term trends rather than events in the rearview mirror.
Of course, there are still many risks in the months ahead. The path of Fed policy is uncertain, and investors are already debating the size of the next rate cut. The presidential election is still close and there are wide-ranging implications for tax policy, regulation, trade, and more. Geopolitical conflicts are worsening with possible implications for global stability, supply chains, and oil prices. Market swings are always possible, especially with valuations and earnings expectations at heightened levels.
The reality, however, is that facing risks is unavoidable when it comes to investing and planning for the future. How we choose to react to those risks is ultimately what determines investment and financial success. Rather than trying to time the market to avoid these risks, it’s far better to hold a portfolio that can weather different market environments.
Below, we provide 5 Insights on the Fed, Election, and Volatility in Q4 2024, and how they might affect markets as we enter the final stretch of the year.
1. The market achieves many new all-time highs during bull markets
First, the market has experienced many new all-time highs this year, including during this past quarter. While this performance is encouraging, it can also create unease among investors who worry that we may be “due for a pullback.”
During bull markets, stock indices have historically reached many new all-time highs, as shown in the accompanying chart. This is almost by definition and is a result of sustained earnings, economic growth, and improving investor sentiment. New all-time highs have not been a reliable predictor of market pullbacks since it’s the underlying market and economic trends that matter. Attempting to time the market based only on index levels often proves counter-productive for this reason.
Of course, market fluctuations are an unavoidable part of investing, and a decline will inevitably occur at some point. However, predicting the timing of such declines is not only challenging, but markets have historically made both higher highs and higher lows. For example, the pullbacks that occurred in April and August this year are a reminder that the market can sometimes recover faster than many investors expect. While the past is no guarantee of the future, it is often better to simply stay invested than to try to jump in and out of markets.
2. The market has performed well under both political parties
Second, many investors are concerned about the potential impact of the presidential election on the economy. According to polling data from the Pew Research Center, eight out of ten registered voters say the economy is very important to their vote in the presidential election. As the race intensifies, it’s crucial to remember that while elections are important for the country and as citizens, it’s important not to vote with our portfolios and savings.
History shows that the stock market has experienced long-term growth under both major political parties, as seen in the accompanying chart. It is not the case that the market or economy crashes when one political party is in office. This is because the underlying drivers of market performance – economic cycles, earnings, valuations, etc. – are far more important than who occupies the White House.
That said, policies can certainly affect taxes, trade, industrial policy, regulatory frameworks, and more. However, policy shifts often occur gradually, and their timing and impacts are frequently overestimated. What politicians promise is often different from what is ultimately enacted. Thus, investors should focus on long-term economic and market trends rather than daily poll results. I know this is tough sometimes, especially given the heated political environment, but letting emotions dictate portfolio moves can be detrimental in the long run.
3. The Fed is expected to cut rates further
Third, inflation continues to moderate, with the most recent data showing the PCE price index, the Fed’s preferred inflation measure, increasing just 2.2% from a year earlier, approaching the Fed’s target rate of 2%. Meanwhile, the labor market shows continued signs of slowing with unemployment at 4.2%, although this is still low by historical standards.
These economic conditions set the stage for the Fed’s first 50 basis point reduction in interest rates in September, with more cuts expected through the rest of the year and in 2025. The market has been anticipating cuts of various sizes all year and rallied in the days following the announcement.
Historical rate cuts are difficult to analyze because why the Fed cuts rates is more important than when or by how much. The Fed has typically cut rates during economic and financial crises, such as in 2008 or 2020. These are times when the economy and market are expected to struggle for extended periods.
In contrast, the current situation is one of achieving balance or a so-called “soft landing,” just as the Fed did in the mid-1990s. The Fed’s rapid rate hikes in 1994 were followed by cuts in 1995 once inflation fears faded. This then paved the way for a long economic expansion and bull market. While this is only one example, it is important to draw the correct historical parallels when it comes to Fed policy.
4. The fixed income landscape is shifting
Fed rate cuts have resulted in lower interest rates across maturities, as well as a “disinversion” of the yield curve. This is sometimes referred to as a “bull steepener” since it can be positive for bonds. In many ways, this is a reversal of the bear market in bonds experienced in 2022 when rates were on the way up.
Bond prices move in the opposite direction of interest rates. This is because already-issued bonds with higher rates become more valuable as market rates fall. Thus, bondholders today not only benefit from higher-than-average yields, but could experience price appreciation if rates continue to trend lower.
For the economy, lower rates improve borrowing costs for corporations and individuals, potentially boosting economic expansion and investment prospects. This can be positive for economic growth which then translates into better earnings and corporate fundamentals. Thus, despite the challenges bonds have faced in the past few years, it’s important to maintain balance across asset classes.
5. Geopolitical conflicts are worrisome but do not directly impact markets
Finally, tensions have risen in the Middle East as the conflict between Israel and Hezbollah has intensified. This adds to global geopolitical tensions including the ongoing war between Russia and Ukraine. While these events have major real-world impacts, their effects on the economy and stock market are less clear cut, and any impact on investors’ portfolios is typically fleeting. As the accompanying chart shows, periods with prolonged market downturns often coincided with major market events such as the dot-com crash or the 2022 rate hikes.
One channel through which regional conflicts can impact the broader economy is oil prices. The escalation in the Middle East has caused a slight rise in oil prices, but the increase is modest compared to previous crises, and the U.S.’s position as the world’s largest oil and gas producer may provide some insulation from global events.
Despite geopolitical uncertainties, the stock market has experienced only two 5% or worse pullbacks this year, emphasizing the importance of staying invested and focusing on broader market trends rather than reacting to headlines.
With the Fed cutting rates, the election on the horizon, and markets near all-time highs, it is more important than ever to stay focused on long-term financial goals rather than short-term events.
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 may contain 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 or Blog 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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