Flash Investment Update

September 20, 2024

By Laura Kuntz, CPA/PFS, MBT Chief Investment Officer and Sr. Wealth Manager

Just yesterday, a big financial event occurred. The Federal Reserve Board decreased interest rates 0.50%, a reduction that is double the traditional 0.25% increment. This occurred more than two years after the Fed decided to aggressively fight inflation, which had reached 9.1% as of June 2021. Inflation is now at 2.5%, close to the Fed’s target of 2%. Our sense is that both the Fed and many world central banks believe inflation is “licked.” 

But now comes the next leg on the journey, i.e., seeking to engineer an economic soft landing. By raising interest rates in 2022 and 2023, the Fed was definitely seeking to slow down the economy in order to reduce inflation. The Fed is getting its wish—economic cooling is happening, with unemployment growing to 4.2% in August. That leaves the next big question: Will we see a soft landing, or will there be something harsher, like a recession? 

Raymond James offers its opinion, saying “a dip into recession—a period of shrinking economic output—only seems like a narrow possibility.” We concur. At the moment, a soft landing seems in the cards. 

What is next for stocks and bonds? Both stock and bond markets have benefitted from the expectation that interest rates would decline:

Year to Date (as of Sept. 18th)*

Global stocks (MSCI All Country World Index) 15%

U.S. Quality Bonds (Bloomberg U.S. Aggregate) 5%

Therefore, perhaps half or more of the “octane” that interest-rate decreases can offer is already baked in. By many measures, large U.S. stocks—which until recently have been “hot hot”—are overvalued; in other words, folks got too excited about this category. But we believe that smaller and mid-sized stocks and international positions may have “room to run.” We also believe that bonds may benefit from ongoing interest decreases. Bonds are now sporting interest rates of 3% to 5% plus as interest rates decrease their principal value may increase. 

Election volatility. We often hear from our clients that they are concerned about this presidential election, and one would think that this level of concern would be hard on markets. But, no, we are at or near all-time highs on the S&P 500 and Dow Jones Industrial Average. We believe that the enormous global energy around decreasing inflation has overwhelmed any U.S. election “weight” on the markets. Now that we appear to be in an interest-rate cutting cycle, that may continue. 

However, there are risks. If the economy falls faster or harder than expected or world events (with all that is going on out there) become broader than expected, we could see the overvalued parts of the market drop significantly. While this is not what we consider to be the most likely scenario, of course, we stand ready to buy on your behalf if attractive prices materialize. 

Of course, you receive emails from us as we update your portfolio, as suitable for market conditions. Our investment committee meets monthly to consider strategies on your behalf. Please let us know your questions. We enjoy hearing from you. 

Footnotes:

*Date from Envestnet Tamarac. 

MSCI All Country World Index – The MSCI All Country World Index (ACWI) is a stock index designed to track broad global equity-market performance. Maintained by Morgan Stanley Capital International (MSCI), the index comprises the stocks of nearly 3,000 companies from 23 developed countries and 24 emerging markets as of Dec. 29, 2023.

Bloomberg U.S. Aggregate – The Bloomberg Aggregate Bond Index, or “the Agg,” is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds as a benchmark to measure their relative performance.

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The foregoing content reflects the opinions of Laurel Wealth Planning LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act or react as they have in the past. 

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