September Commentary

Wow! A lot has changed in a month!  At the beginning of August, the stock market (S&P 500) was in the middle of what would become a 10% drop, and here we are at the end of the month back at the highs.  The market isn’t leaving people a lot of time to think and ponder, and if you were on vacation, you might have missed the whole thing.  Luckily, we saw this as an opportunity to pounce and picked up some great securities during the decline, setting us up for some great returns down the road!

To note:

• The odds of a recession are greater as the economy shows some signs of slowing.
• Concern is increasing that the Federal Reserve is behind the curve….. again.
• Interest rates on 10-year Treasuries are about the same (~3.9%) as at the beginning of the month.
• High Quality (HQ) bonds are starting to act like risk diversifiers.  When stocks go down in price, HQ bonds go up in price.  This is good and the way it should be, but it hasn’t been that way in a while.
• U.S. Stocks are up ~20% year to date.

There are a couple of things we want to unpack here.  The odds of recession have increased slightly.  We talked a lot about this in our August Investment Committee webinar.  We are seeing a couple data points that are going in an unfavorable direction, including jobless claims, industrial production, and housing starts.  We are also seeing improving data on the Consumer Price Index (CPI), which means inflation is pretty contained at this time.  This opens the door for the Federal Reserve to normalize interest rates.

The market is predicting that the Federal Reserve will cut interest rates with 100% probability according to the CME FedWatch tool, a popular tool used to track the probabilities of changes to the Fed rate.  68% of the market thinks they will cut by 25 basis points, and the other 32% think they will cut by 50 basis points.  These odds seem about right, but the key takeaway is that we are likely entering a Fed rate cut cycle.  While the length and depth of this cycle will be driven by how the economy and inflation react, expectations are that it will last into next year and flatten out the yield curve.  This is generally good for stocks, if everything goes as planned.

With respect to the election, the question to ask is, does Fed policy matter more than who is in office?  Not an easy question, but this should highlight that the presidential election is not the only variable influencing markets.  This is why we say so often that investing with politics is not the most profitable strategy.  This election is likely to be close all the way up until the night of the election, so until there is more clarity, we believe the Fed is the main actor to watch on the Washington D.C. stage.

Some people are referring to the economy now as “normalizing” after enduring Covid, major business shifts, supply chain issues, and high inflation.  This also means that people are seeing markets act more normal. Take for example, the relationship in price change for high quality bonds and stocks.  When stocks run into trouble, investors tend to hide out in high-quality assets like bonds.  When inflation was running rampant or when interest rates were zero, this relationship was less predictable.  We welcome a more “normalized” market.

Lastly, the market has been defying gravity this year, and strong markets leading into the 4^th quarter tend to end strong.  But with the addition of an election, global instability, and Fed policy added to the recipe, you never know where things will head.  The promise we make is we will be watching closely, not taking anything for granted, and making the shifts we think are appropriate to weather any possible turbulence we might face on our journey.

Jordan Kaufman

Chief Investment Officer

Green Ridge Wealth Planning