Topic: Portfolio Management

The stock and bond markets continue to hinge on the Federal Reserve’s battle against inflation. From September to October, inflation remained flat, as tracked by Consumer Price Index (CPI). This report came as gasoline prices fell 5% for the month, which in turns means that households have more money to spend. 

CPI, which measures a broad basket of goods and services and is a key barometer for tracking and measuring inflation, increased 3.2% from a year ago. The chart below shows price changes for core categories year over year. 

What’s not in the chart is shelter, which is the average household’s biggest expense. This has accounted for more than 70% of the total year-over-year increase in CPI. Most inflationary pressures still stem from the pandemic and the imbalance between supply and demand. 

Inflation Breakdown for October 2023

These are some of the core categories, plus other items with notable year-over-year price changes.

Supply chains were totally thrown off during the pandemic, driving up prices for goods at the same time consumers were flush with cash. Since then, supply chains have returned to normal, but it takes time for prices to ease. The annual level is the lowest in two years but still above the Fed’s 2% tracking level. Both the stock and bond markets are sending signals that the Fed is through raising rates, but the data continues to send conflicting signals. 

Last week, Fed Chairman Jerome Powell said the Fed remains unconvinced that it has done enough to get inflation down to the 2% annual rate and won’t hesitate to raise rates if needed. Uncertainty remains over how long the Fed will keep the benchmark rate at its current levels. 

After we saw the best week of the year for stocks two weeks ago, the market continued to show strength last week with another strong market return. Following the release of the CPI number on Tuesday, the stock and bond markets rallied. If inflation remains on a sustainable path lower, the Fed may cut rates sooner than expected in 2024.

If the Fed were to cut interest rates earlier than expected, we could see the stock market trend higher. With 2024 being an election year, the Fed probably will tread lightly so as not to influence the vote. An interesting side note: For the last 10 new presidents, stocks have been higher during an election year, with an average return of 12.2%.

Stocks Have Never Been Lower in an Election Year Under a New President

S&P 500 performance under new presidents (1950-current)

We understand that elections can cause anxiety over who may win and what may happen. Elections can impact the economy and the markets based on each candidate’s proposals, but it is far too early to outline what that may look like. What we must keep in mind is that the economy has continued to grow throughout every presidency in our nation’s history. 

Market volatility may increase because we don’t know who will be in the White House, but stocks tend to forge ahead as uncertainty fades. Elections seem like a big deal in the moment, but historically they have had little bearing on what paths the economy and the market ultimately will take.

The U.S. Economy Has Continued to Grow Regardless of Who Is in the White House

U.S. Nominal Gross Domestic Product (GDP), USD billions

We will continue to beat the drum next year to remind our clients that what matters most is the macro economy, not who may or may not win the election. Evidence is becoming clearer that the economy will avoid a hard recession — and may avoid a recession altogether. That does not mean that there are not risks, especially with the conflict in the Middle East and Ukraine, but regardless of which way the election swings, opportunities are always present.

Based on the likely scenario that the Fed is through with rate hikes, the most readily apparent consideration is that yields typically fall soon after. This means that cash will carry reinvestment rate risk. In other words, when the Fed begins to lower rates, money market rates will drop as well. If you are waiting to deploy cash due to higher money market rates, know that it may be too late to put that money to work into either stocks or bonds once the Fed cuts rates.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Carson, CNBC, JP Morgan

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The Federal Reserve kept the benchmark Federal Funds Rate unchanged for the second meeting in a row. As we wrote last week, Treasury yields have risen sharply since September. Longer maturity bonds had taken the brunt of the pain over the last few months, as the 10-year Treasury briefly eclipsed the 5% level, which had not been seen since 2007.

Along with the pain in the bond market, the stock market experienced a correction with stocks down more than 10% from their recent peak. Investors may still have some PTSD from 2022, when both stocks and bonds were down at the same time, but that was a rare occurrence. 

Market corrections are normal. There have been corrections in 22 of the past 44 years, and according to Ned Davis research, there are 1.1 corrections per year on average going back to 1950. This suggests that the market falling 10% or more in a year is a normal occurrence, but each time it happens, the occurrence feels unique.

Volatility Is the Toll We Pay to Invest

S&P 500 per year (1950-2022)

Last week, the stock and bond markets rallied after the Fed announcement and the weaker-than-expected payroll report, which limited concerns of a recession. The 10-year Treasury bond yield fell to almost 4.5%, well off the recent 5% yield reached two weeks ago. As bond yields fell, stocks surged, marking the best week of the year.

Historically, November and December have been strong months in the market, and November has been the best month of the year, gaining 1.7% on average. The strength in the month of November may be tied to the fact that August, September and October have historically been the weakest three-month stretch of the year. Another interesting tidbit: December has been strong in pre-election years, which is the case this year as we head into 2024.

November Is the Best Month of the Year

S&P 500 Index average monthly returns (1950-2022)

From a portfolio management perspective, we continue to look ahead. The markets are forward-looking, often telling us what may happen ahead of time. We continue to watch and wait for the most anticipated recession in history. Inflation continues to show signs of weakening but remains persistently — and stubbornly — above the targeted 2% level.

With an eye on the future, we are making the following portfolio changes as we end the year:

1. Through the end of October, only two sectors had positive year-to-date returns: technology and consumer discretionary. Every other sector was negative. The “Magnificent Seven” tech stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — were the main reason the S&P 500 had a positive return through October. The broadening of the market away from those seven names had yet to materialize. 

Healthcare, which historically has been a sector to own in a struggling economy, has been underperforming over the last several years. This is partly due to pressures on drug pricing as well as higher interest rates hurting less profitable companies in the faster-growing biotechnology space. We have decided to reduce our exposure to healthcare and move those monies to a holding that focuses on companies that display positive fundamentals: return on equity, stable earnings growth and lower financial leverage.

2. We have continued to increase the duration of the fixed-income portfolio as interest rates have continued to climb. The longer-dated maturities at the end of the yield curve are more volatile than the short end of the yield curve.

For example, in the chart below, let’s start by looking at the 5-Year Treasury row and the 0-bps column (4.58%). If interest rates were to rise by 100 basis points (1%), you would theoretically earn 1.08% over that time frame. However, if interest rates dropped by 50 basis points (.50%) in the next year, you would earn 6.39% in total.

By comparison, let’s look at the 10-year Treasury bond, a longer maturity bond than the 5-year Treasury. If rates were to rise by 1%, you would lose 2.64%; if rates were to fall by .5%, the potential rate of return would be 8.25%. Because we believe we are near the end of the Fed rate increases, we are continuing to extend the duration of the portfolio and increase the credit quality by adding a position in longer-dated Treasuries. We believe that when rates fall, we will be able to capture nice income along with capital appreciation from rising bond prices.

Interest Rate Scenario Analysis

This analysis illustrates the total return of the U.S. Treasury security of a set maturity, over a given time period and a range of interest rate shifts.

We continue to reposition the portfolio in response to where we think the puck is moving. The world in which interest rates stay higher for longer is not one we have been accustomed to for the last 15 years. Financial markets, both stocks and bonds, may be more volatile in response.

With higher yields for longer periods, investors are being compensated in cash through money market and CDs. However, as soon as the Fed lowers the Federal Funds Rate, we will see those yields fall rapidly. We think much of the pain from rising interest rates is behind us, and the key to navigating volatility still is to be in a diversified portfolio. We will continue to monitor the portfolio and make changes to skate toward the puck, rather than wait for the puck to come to us.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, Carson, CNBC, Ned Davis, Wealth of Common Sense

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The old saying that markets tend to rally on a wall of worry proved itself at the end of last week and the start of this week. Worries continue to pile up: The U.S. is without a House Speaker, yields continue to rise, a potential government shutdown looms in November, and now there is a war in Israel.

At this time last year, stocks were in a bear market and inflation was soaring. This week marked the bottom of the market in 2022, and as history shows, stocks tend to bottom in October.

Market shocks and crises are a part of the investing landscape. They are no doubt painful, but we eventually recover, and as we know, there are no guarantees. In moments of crisis or uncertainty, it is easy to wait for clarity before investing, sitting on cash. Since 1987, there have been 23 market shocks, including the 1987 crash, the tech bubble, the global financial crisis, the global pandemic and most recently, the rise of inflation.

The chart below shows that markets have recovered from the shocks to go on and reach new highs, making a long-term perspective critical for investors. Long-term performance tends to be more dependent on the economic cycle than geopolitical developments.

Market Disturbances Are a Fact of Life

So far, the market has taken the war in Israel in stride. Oil prices rose 4% following the news, after having fallen almost 10% last week. If the war remains isolated to Israel and Gaza, the impact to oil and the world economy will be minimal. However, if the war broadens into a regional conflict and Iran is targeted, this could lead to a disruption in the global oil supply of crude oil.

As shown in the chart below, stocks have been mixed following major world events going back to WWII. More than 63% of the time, stocks have been higher one year later, but there have been both major upticks and downturns during that time — with an average return of a little more than 2%. Conflicts may flare up, but they tend not to make investors bearish, outside of a recessionary global economy.

How Do Stocks Do After Major Events?

S&P 500 Index performance after geopolitical and major historical events

The U.S. economy remains strong. The economy relies on the consumer, and consumption comes from income. Income comes from employment growth, wage growth and hours worked. All these factors are up, with the pace of weekly income growth stronger than the current pace of inflation. It was announced last week that the economy created 336,000 jobs in September, almost double the expected number.

Additionally, there was a smaller-than-expected rise in wages, which sparked a market rally. The falling wage pressures indicate that the supply and demand imbalance with workers is normalizing as more people return to the workforce. Wage growth, as measured by average weekly earnings, has eased back to the pre-pandemic pace. 

The Fed is unlikely to tighten further if stronger-than-expected wage gains do not accompany stronger-than-expected job gains. Ultimately, corporate profits come from economic growth, and that will eventually play out as earnings season gets under way this week.

While there is a lot of fear, especially since it is the month of October and the markets have had a rough few months, the market remains oversold. It’s also important to remember that bull markets have dominated bear markets. Since 1950, bear markets have lasted 12 months on average, while bull markets have lasted 67 months and have seen an average return of 265% compared to a decline of 33%.

Market recoveries are rarely straight up, as seen in the first chart, but those investors who can move past the noise and take a long-term view stand a better chance of long-term gains. 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Source: Bespoke Investment, Carson, Capital Group, Horizon

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

September lived up to its reputation as historically being the worst month for stocks. The S&P 500 and NASDAQ suffered their biggest monthly losses of the year last month. The S&P 500 could not avoid its first down quarter in a year. 

This past quarter was just the fourth in the past 30 years in which stocks and bonds each declined at least 2.5%. (All four of those quarters have been since 2022!) The correlation between stocks and bonds is back near 25-year highs, as seen in the chart below.

What does this mean?

When inflation is higher, stocks and bonds tend to have a positive correlation, i.e., they move in the same direction at the same time, whether that is up or down. Other factors also affect the correlation, but what this means for you is that during times of higher stock and bond correlation, diversification may not be as effective in mitigating downside risk.

52-Week Rolling Stock/Bond Correlation

The U.S. avoided a government shutdown with a last-minute deal this past weekend. However, several headwinds remain before the market moves higher: rising bond yields, oil prices and the strong U.S. dollar.

• The 10-year Treasury hit its highest level since October 2007 this week, breaking above 4.7%. Higher bond yields in September put significant pressure on stocks. Bonds impact stocks in several ways. When bond yields are higher, they compete with stocks for investment dollars because they can be more attractive in the short term. Bonds also figure heavily into the way investors think of valuing stocks, especially for growth-oriented companies. In a higher-yield environment, future projected earnings are worth less to investors today. Therefore, companies that are less profitable or have higher growth get hit harder when rates rise.

• In the third quarter, oil prices rose almost 30% to more than $90 per barrel. The increase in prices over the summer reflects a mismatch between supply and demand. Available supply from major oil exporters, such as Saudi Arabia and Russia, took steps to reduce production, driving prices higher. Consumers in turn are paying more at the pump, which cuts into the money that they have available for discretionary spending on items that are not the staples that they need on an everyday basis.

• After the dollar reached levels not seen in almost 20 years, the dollar had been on a downward trajectory since its peak in 2022. But the dollar now has risen almost 7% since the beginning of July. Historically, a strong dollar has meant weaker earnings and sales for companies that generate a large portion of their revenues from overseas. Converting profits from sales overseas in weaker currencies to the stronger dollar can weigh on revenues and, therefore, earnings.

Reasons for Optimism

On the flip side, the S&P 500 experienced its best seven-month start to the year since 1997. The August and September slump may be setting up stocks for a year-end rally. There are reasons to be optimistic, but during times like this, you must look harder through the forest to find those trees.

• The fourth quarter is typically the best quarter of the year for stocks. The S&P is up almost 80% of the time and averages a positive return of 4.2%, twice as strong as the next closest quarter. One possible reason is that the third quarter has traditionally been the weakest, and the market maybe rebounding from that.

• The government was able to avoid a shutdown for another 45 days at current funding levels. The legislation buys time for Congress to reach an agreement on spending for the next year. As we have written previously, government shutdowns historically have not caused a major reaction in the markets. Shutdowns can increase volatility, which we have seen over the last few weeks, with the VIX index rising.

• Student loan payments started accruing interest again on Sept. 1, with payments coming due Oct. 1 after a long pause. Loan repayments started to surge this summer; so far, that has not adversely affected consumer spending.

The Fourth Quarter Is Historically the Strongest of the Year

S&P 500 Index quarterly returns (1950-2022)

The average 10-year Treasury yield since 1926 is 4.8%, right around the level where we are today. As the chart below illustrates, the best market returns have been in periods of low interest rates, as well as when rates are at their highest levels. This may be because we have not had many times of high inflation, and when those conditions did occur, we saw raging bull markets that followed.

In every instance below, the stock market has produced a positive return when looking at a long-term view in terms of years, not days. We can’t stress enough to you, our clients, that during times of higher volatility and increasing negative sentiment, it is imperative to see the stock market as a long-term investment. Over the long term, it has paid off to stay invested in stocks and ride out the short-term waves.

Starting Interest Rates vs. the Stock Market Since 1926

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, Carson, Schiller, CNBC, FS Investments

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

As expected, the Fed did not raise the Fed Funds rate last week, but it did leave the door open for at least one more rate hike this year. The Fed also indicated that fewer interest rate cuts may happen next year than had been previously expected. The bias position of “higher-for-longer” caught the market somewhat by surprise, as the Fed’s board of governors moved rate projections for next year to just 50 basis points (.50%) of interest rate cuts, compared to the 100 basis points (1.00%) reduction from the June forecast.

Fed Chairman Jerome Powell said the Fed is concerned that continued economic growth could reignite inflation. Instead of wondering how high rates will go, investors are now wondering how long they will remain high.

Markets did not react favorably to the news. Other circumstances continue to weigh on the market as well, most notably the pending government shutdown and autoworkers strike. While we don’t believe a government shutdown negatively affects the market over the longer term, the uncertainty caused by a shutdown can have short-term implications.

For example: The Fed is data dependent, and if there is a shutdown, key data may not be available for the Fed to interpret. If the shutdown were to last for several weeks, this could impact the Fed’s decision as to whether to raise rates; the shutdown’s economic impact would lead to additional headwinds, potentially giving the Fed pause.

In some ways, Chairman Powell’s rhetoric may be geared toward the stock market. If he were to pivot to a more dovish tune — favoring lower rates sooner — this may push the market higher (for both stocks and bonds) and could result in loosening of financial conditions. This in turn could also reignite inflation — which is exactly what he wants to avoid.

The underlying data still suggests that inflation is moderating, even though August CPI was higher than expected. As we have written before, shelter costs — a measure of rents only and the largest component of CPI — continue to drop as rents appear to be flattening out or declining in many cities. 

At the same time, the unemployment rate rose from 3.5% to 3.8% in August. The labor market is a key factor for the Federal Reserve for setting policy, and it is showing softness. As seen in the chart below, the U.S. nonfarm payroll — which represents about 80% of all workers — is a measure of how many people are employed in manufacturing, construction and goods. While it saw an uptick in the last few months, the level of nonfarm payroll remains well below the last three years.

This is a good sign for the Fed, as one of the goals of lowering inflation is raising unemployment. The supply chain of workers also is on the rise, as the employment-to-population ratio (for prime-age workers) has recovered to where it was in the late 1990s and early 2000s.

A Cooling Job Market Could Remove Pressure for Additional Rate Hikes

Monthly change in U.S. nonfarm payroll employment (thousands)

The investor’s mood has shifted over the last few months, going from optimism about the year’s strong start to negativity and concern that the market is going lower. Volatility, as measured by the VIX index, rose 25% last week from levels not seen since before the pandemic. The market, as measured by the S&P 500 Short Range Oscillator, is moving closer to oversold territory. Oil prices are hovering around $90 per barrel. The 10-year Treasury has climbed to more than 4.5%. A government shutdown is on the horizon. 

For long-term investors, however, it can be helpful for stocks to pull back and catch their breath. The economy is picking up steam as economists have raised GDP expectations for the remainder of the year. The Fed did not change its long-run rate expectations. Credit markets remain solid, and the U.S. economy continues to create jobs.

Two additional strong forces, artificial intelligence and industrial policy, could continue to move markets higher. AI continues to improve efficiencies, which in turn raise profit margins. Fiscal policy has incentivized companies to invest in manufacturing, clean technology and infrastructure projects. These trends are projected to continue for many years and potentially deliver support to equity markets.

The chart below is a good reminder that a down performance in August and September doesn’t mean the fourth quarter will play out the same way. Since 1952, the S&P has returned an average of 7% during the fourth quarter when August and September were negative.

Down Big in August and September Isn’t a Bad Thing

S&P 500 performance when down 1% or more in both August and September

When the markets are feeling the most negative is a time to feel optimistic. You can always find reasons to be negative and feel like the market will go down, but there also is always the ability to be optimistic and find market opportunities.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Source: CNBC, Capital Group, Bloomberg, Bureau of Labor Statistics, JP Morgan, Carson Financial

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Anxiety is rising about the stock market and the economy — and we are still months away from the next election year, when tensions surely will rise. Everywhere we turn, we see negative headlines about a potential government shutdown, inflation ticking back up, a potential recession, the UAW strike, the Fed’s plan for interest rates, student loan payments, a possible real estate crash, bankruptcies rising, and credit card debt surpassing $1 trillion for the first time.

These are legitimate concerns, but we think the chances of them becoming larger issues are smaller than many people expect.

Let’s first address the elephant in the room: the fast-approaching deadline for a potential government shutdown. During the last 20 government shutdowns since 1976, the market has been down only .3% on average, with the largest drawdown being 4.4% and the highest gain being 8%. A potential shutdown may cause only modest losses in economic output — and as is always the case, certain sectors may benefit, such as defense and healthcare.

Stocks Tend To Be Mixed During Shutdowns

S&P 500 returns during prior U.S. government shutdowns, %

Turbulent markets in 2022 and the prospect of higher money market and Treasury yields led investors to flock into money market funds and Treasury bills. Money market funds are at an all-time high of over $5.6 trillion. Cash investments remain attractive to many investors today, but the Fed appears to be nearing a turning point. 

No one knows for sure when the Fed will stop raising rates. However, the markets are projecting that we are very near peak rates and that rates may decline starting next year. Sitting in cash may feel very comfortable with rates over 5%, but the benefit of cash is eroded by moderate inflation. Additionally, cash or Treasury bills may see little additional upside once the Fed finishes raising rates. 

History shows that in the 18 months after when the Fed finishes raising rates, yields on cash-like investments have gone down rapidly. At the same time, both equity and fixed income returns were strong in the year that followed and remained strong for the five years that followed as well.

After Fed Hikes, Long-Term Results Outpaced Cash

Results have been front-loaded following the final Federal Reserve hike in the last four cycles (%)

After student-loan payments were paused in March 2020 because of the pandemic, borrowers will be forced to start payments again in October. Americans paid about $70 billion toward student loans in 2019; it is unlikely we will go right back to this level. Many people continued to pay their loans and didn’t take the government up on its free pass. 

The Biden administration recently cancelled $39 billion in loans for 800,000 borrowers. At the same time, a new plan called Saving on a Valuable Education could benefit another 20 million borrowers, forgiving loan balances after 10 years of payments, compared with 20 years previously.

Because of the pandemic, people didn’t spend as much as they typically would have. Much of that excess savings is now gone. Some fear that consumers are tapped and that without excess savings, the economy will not be able to grow. In actuality, the savings rate has grown over the past year, from 3.2% to 4.5%, but that growth not apparent if one is looking only at excess savings.

When the Fed raises rates as sharply as it did over the last 18 months, it often is viewed as a precursor to a recession. Many anticipate a recession because of an anticipated real estate crash and potential bankruptcies from an inability to refinance debt and banks not lending money.

Many mortgages and loans remain at very low rates, as many borrowed aggressively when rates were at historical lows. The economy has remained strong but is not overheating, even with slowing inflation and a tight labor market. With a higher stock market and home values, investors feel comfortable and are not as concerned about savings.

There will always be reasons to worry or wonder if you should try to time the stock market — especially given the concerns we’ve listed above that can seem overwhelming. However, not doing anything can be a very powerful choice, especially when short-term yields are over 5%. Investor emotions are real; and as we have written before, Loss Aversion Theory tells us the fear of losing money is stronger than the joy that comes from making money. 

Losses in the past — such as 2008, 2011, 2018, 2020 and most recently last year — can leave scars for investors. However, as we continue to write weekly, we are in this for the long term —and markets don’t idle for long. Investors in cash may end up stuck if they wait too long to get back into the market.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Source: CNBC, Capital Group, Bloomberg

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.