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.
____________________________________________________________________________________________________________________
Future investment performance can never be guaranteed. Laurel Wealth Planning does not practice law or accountancy. Please consult your attorney and tax advisor in these areas. Please contact us at 952-854-6250 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions.
The forgoing content was created by Laurel Wealth Planning with verbiage, style, and/or format input from Indigo Marketing Agency.
The foregoing content reflects the opinions of Laurel Wealth Planning LLC and is subject to change at any time without notice. Content provided herein has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets, or developments mentioned. The content 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.
As a precautionary measure, we cannot rely on e-mail requests to authorize, direct, or effect the purchase or sale of any security, wire transfer, or to effect any other transactions. Such requests, orders, or other instructions sent via email should be confirmed verbally or by written instructions faxed to 952-854-6250 prior to their anticipated execution. We are unable to ensure that emails sent to you from us, or sent from you to us, will be received. Please contact us at 952-854-6250 if there is any change in your financial situation, needs, goals, or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend that you compare any account reports from Laurel Wealth Planning LLC with the account statements from your custodian. Please notify us if you do not receive statements from your custodian on at least a quarterly basis. Our current disclosure brochures, From ADV Part 2 and Form ADV Part 3, are available upon request and on our website, www.laurelwealthplanning.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.
Laurel Wealth Planning LLC (LWP) is an Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply any level of skill or training. LWP is a wealth management firm and does not practice law or accountancy. The information and material contained in this communication is confidential and intended for the recipient addressee named. If you are not the intended recipient, please delete the message and notify the sender immediately. The forgoing content was prepared by Indigo Marketing Agency with verbiage, opinions, and/or financial commentary input provided by Laurel Wealth Planning.
Laura, the founder of LWP, is a Senior Wealth Manager, Chief Investment Officer and Shareholder. She has a master’s degree in tax and is an excellent listener. While she is a sophisticated financial planner with experience in complex issues, her priority is ensuring a financial plan works for people.
