Topic: Portfolio Management

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.

The drumbeat of negative news and noise remains constant. For some investors, it may be hard to remain optimistic with all the headlines about high inflation, higher interest rates, political discourse and a potential government shutdown — not to mention the upcoming election.

These feelings are valid — but they are only feelings. Feelings are not necessarily based on data and do not necessarily reflect how the stock market views the world. Feelings can be influenced by which political party you favor, but the market doesn’t care which party you like. It cares only about where the market is headed.

Here Comes the Worst Month of the Year

S&P 500 Index Average Monthly Returns (1950-2022)

Historically, September has been the worst month for stocks and is one of two months that have been negative in a pre-election year cycle. Going back to 1945, the S&P 500 declined more than half of the time, with an average return of -0.73%. Going back to 1960, however, the last three months of the year have seen positive returns following a negative September. So while the immediate forecast for September may seem ominous, it is important to see the entire forest and not just the one tree in front of you.

If September is historically the stock market’s worst month, why would this September be any different? There are always silver linings to be found in the market if you look for them.

• Artificial intelligence: AI has fueled much of the rally for the year. Even outside of the technology sector, companies have jumped on the bandwagon and are embracing how AI can transform their businesses.

• Cash, cash, cash: Investors are holding more than $5.5 trillion of cash that is waiting to be invested into the market. Excess cash could help the market drive further gains.

• Apple: Wall Street is expecting the company to debut the next iPhone as well as new watches next week. Apple is the largest component of the S&P 500 at 7.35% of the overall index, and as Apple tends to move, the market follows. 

• ARM IPO: British chip design firm ARM Holdings is set to go public next week in the largest technology IPO for the year, with an estimated value at $52 billion. Investors are hoping that this breathes new life into the IPO market that has seen very little action since 2002. Mega cap tech companies are publicly talking about wanting to own stock in ARM.

• Credit spreads: A credit spread tells us how much extra interest over Treasury bonds investors are demanding from corporations that want to borrow money. If investors are worried about a recession, they may expect lending to companies to be riskier and, therefore, demand higher interest rates to compensate for the additional risk. As of today, spreads remain tight, and as seen in the chart below, they are not showing signs of stress compared to the recessionary periods in gray.

Credit Markets Show No Stress

The last nine times that the market has been up more than 15% for the first seven months of the year and then had a negative August, the market averaged an 11.4% return over the final four months of the year. Will 2023 experience similar returns? Only time will tell, but as seen in the numbers below, the results have been positive 100% of the time.

Clues September Could Surprise Higher

S&P 500 Performance After a Big First 7 Months and Negative August

The month of September remains a mystery. With the Federal Reserve meeting later this month, the possibility of higher rates remains — along with a potential government shutdown on Oct. 1. There are always silver linings to find in the market, as we outlined above, and we are looking forward to the remaining four months of the year. One thing that we can count on is that the markets are never dull. The markets remain forward-looking and focused on earnings over the long run — not on a day-to-day basis.

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, Yahoo

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 we wind down the summer and get ready to enjoy Labor Day weekend, we are looking forward to cooler weather and calmer markets than we have seen in August. The month played out like we thought it would, with the markets taking a respite from the strong start to the year and stocks falling nearly 5% from the late July peak.

Each year, the S&P 500 typically experiences three corrections of 5% or more and one correction of at least 10%. (In March, we saw a pullback of nearly 8% after the failure of Silicon Valley Bank.) On average, a bear market happens almost every three years. Interestingly, the markets typically see more than seven 3% corrections in a year. 

It is vital to remember that volatility is normal — even in a bull market. Thinking of volatility in the stock market as a series of speed bumps rather than a roadblock can help you remain focused on the long-term plan rather than the short-term pain. 

Volatility Is the Toll We Pay to Invest

S&P 500 per year (1950-2022)

Michael Burry, known for correctly predicting the epic collapse of the housing market in 2008, recently made news with another big bet against the stock market. It’s important for investors to remember that he is a trader who runs a hedge fund. He is not focused on long-term investing. He is hoping that one of his bets hits it big, and he then keeps a large portion of his investors’ profits. He is hoping for one big hit, but the assumption is that he knows he will have many strikeouts along the way.

It may take years for his investment theory to play out — if it plays out at all. We don’t have insight as to changes he makes or when he may decide to close out his short bet against the market. This is not the first time that he or other outspoken hedge fund traders have made bold predictions on the direction of the market. The chart below provides some interesting perspective on Burry’s recent warnings and how the market has fared for the six months that followed. This is a good reminder not to listen to the noise or get caught up in the headlines about large bets against the market.

Burry-ed

Six-month annualized S&P 500 rise after Michael Burry warnings

As fall approaches, we will begin to hear more discussion of a potential government shutdown on Oct. 1. Despite the debt-ceiling agreement earlier this year, Congress has not agreed on spending levels for fiscal 2024.

Historically, government shutdowns have not had a major impact on GDP or the stock market. The last six government shutdowns occurred in quarters with positive GDP growth. If another shutdown were to occur, this would be the seventh. However, Moody’s — the only one of the three major rating agencies that has not downgraded the U.S. debt — has commented that a shutdown this fall could lead to either a potential downgrade or put the U.S. on watch for one. 

A shutdown may lead to higher spending, which could continue to keep the economy humming along. At the same time, the U.S. is experiencing higher interest service costs due to higher interest rates, higher spending on entitlements and lower tax revenues. All of these factors are worsening the federal deficit. It is more than likely that after the 2024 election, we will be looking at a period of fiscal austerity to rein in spending.

Real GDP Growth Rate During Past Government Shutdowns

Percentage change from the preceding quarter

This year’s key players — the Federal Reserve Bank, Wall Street and Main Street — all suggest that the outlook feels better today than at this time last year. With the market pulling back some in August, valuations look less lofty heading into the final quarter of the year. For fixed-income investors, better protection is being provided as well, with interest rates near peak. It is important to remember that even bull markets see periods of volatility — and volatility is perfectly normal for this time of year.

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, FactSet, U.S. Bureau of Economic Data

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.

While we may hear about bonds or fixed income in the news, they typically don’t draw as much attention with retail investors because they are not as well understood or as alluring as stocks. While stocks fell for the third week in a row, bond yields moved higher. In just the last month, 10-year Treasury yields have gone up over 50 basis points (0.5%), reaching their highest levels since 2007. Yields across the globe are at their highest levels since 2008.

The Federal Reserve bank controls short-term rates. We have often heard about how many times the Fed has raised rates over the last year and a half. With the higher rates, we earn more interest on our cash, as money market rates are now over 5%. But what is driving long-term rates higher?

Inflation

Inflation has been front and center since the recovery from the pandemic. As we wrote last week, year-over-year inflation continues to come down compared to prices, but items generally cost more than they did than a few years ago. While the trend remains one of cooling and expectations are that prices should continue to fall, the Fed continues its rhetoric of higher rates for a longer time — and there still is the possibility of one or two more rate hikes.

Growth

We have been waiting for a recession for more than a year. The economy has survived rate hikes of more than 525 basis points (5.25). At the same time, most people who want a job can find one, and the unemployment rate is near historical lows at 3.5%. The consumer is still eager to spend, and credit card debt broke the $1 trillion mark for the first time.

The housing market is showing signs of stabilizing, even with 30-year mortgage rates reaching levels not seen for many years. The infrastructure bill passed last year has hopes of revitalizing spending in infrastructure and manufacturing. Artificial intelligence is expected to change the way we live and work for the better, and the U.S. GDP continued to grow at an annual rate of 2.4% in the second quarter.

Uncertainty

Investors tend to require more yield or compensation for locking up money over a longer time versus short-term periods of time. For bonds, that means demanding a higher yield for bonds that mature in 10 years than those that mature in two years. When things are more uncertain, investors demand even higher yields. A few events recently have added to bond anxiety, and thus higher yields:

• Fitch downgraded the credit rating of U.S. Government debt by one notch, from AAA to AA+.

• At the same time, the U.S. government is issuing more debt than expected to pay for spending, due to a combination of lower tax revenues and higher interest costs from higher interest rates.

• The Bank of Japan raised rates on its 10-year bond to 1.0%. The Bank of Japan is a large buyer of U.S. Treasuries, and with higher rates being offered in Japan, it may choose to shift its buying to its own bonds.

A combination of better growth and uncertainty seems likely to be behind the higher rates. A more resilient economy could mean that the Fed plans to keep interest rates higher for longer, even if it doesn’t raise rates again.

With yields near the peak, this may provide an opportunity for investors to extend the duration (think of maturity) of their fixed income portfolio to lock in some of the highest rates we have seen since 2007. One way to accomplish this is a laddered bond portfolio of Treasuries.

A bond ladder, illustrated below, refers to purchasing bonds in a stepladder fashion with consecutive maturities to reduce credit risk, interest rate risk and volatility in a portfolio. For example, one may purchase an even amount of bonds maturing in increasing spans of time. As the bonds mature, you replace them in the next step of the ladder. If rates go down, you want to extend the bond ladder farther into the future. If you are worried rates will rise, you would want to shorten the bond ladder.

Most economists are not expecting the Fed to raise interest rates much further than where they are today, with the Fed Funds rate at 5.25-5.50%. With inflation on the decline, there is discussion of disinflation starting to rear its head, especially with vehicle and shelter prices easing further. With the government issuing more supply of Treasuries to cover a rising deficit and fund the tax shortage, longer-term bond yields continue to rise and decrease the spread between the short-term Treasuries and longer-term Treasuries. 

Higher long-term bond yields mean investors expect the Fed to keep rates on the higher side for a longer time, especially with the strong recent run of economic data. Expectations for future growth are shifting higher as the economy continues to prove its resilience. Ultimately, the bond market is signaling that rates may have to be higher than we have been used to over the past decade, which can be a good thing for investors seeking income.

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: JP Morgan, Schwab

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.

In a surprise move last week, one of the three credit rating agencies downgraded the credit rating of U.S. Government debt by one notch, from AAA to AA+. Fitch’s explanation for the move was that the downgrade “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to AA and AAA rated peers over the last two decades that has manifested in repeated debt-limit standoffs and last-minute resolutions.”

The change echoes a similar move by Standard & Poor’s (S&P) in August of 2011, when it downgraded the U.S. debt from AAA to AA+. The timing of last week’s downgrade is unusual given a lack of near-term concerns with the debt ceiling and the continued strength surrounding the U.S. economy. When the S&P downgraded U.S. debt in 2011, the economy was softening, inflation was declining, and yields were falling in other global markets. This time around, central banks are hiking rates in most markets.

Moody’s remains the last of the three major credit rating agencies to maintain a top rating for the U.S. After the downgrade by Fitch, the U.S. ranks lower than Australia, Canada and some European countries, as seen in the chart below. If Moody’s were to downgrade the U.S. debt, that could exacerbate fiscal concerns — but even then, while volatility may increase, economists are skeptical that it would have a material impact on the U.S. bond market.

The U.S. debt is still viewed as a safe haven for many reasons: The U.S. has the ability to service the debt (even at higher interest rates), the economy is growing at a solid pace, and foreign capital inflows remain strong. There is no worry that the U.S. will default on its debt.

OECD Countries’ Credit Ratings

After a downgrade, the U.S. now ranks lower than Australia, Canada and some European nations like Germany in terms of creditworthiness under Fitch metrics. These nations were also rated triple A by S&P, a notch above the U.S.’s AA+.

We do not have long-term concerns about the downgrade. Here are a few key points to keep in mind:

• Fitch is considered the third-ranked rating agency of the three and has less influence on the market than S&P or Moody’s. 

• The downgrade is not a growth forecast but a commentary on the state of the current (apparent) instability of our government from a political standpoint.

• This is not about the ability of the U.S. to service its debt. Fitch had warned during the debt-ceiling standoff earlier this year that it was considering a downgrade because a country refusing to pay its debts in a timely manner was not entitled to a AAA rating.

• We don’t expect the downgrade to affect many investments because few require AAA ratings. After the S&P downgrade in 2011, many institutions changed their investment mandates to state government bonds instead of a specific credit rating.

• The debt limit has been lifted for two years, inflation is slowing, and economic growth remains strong.

• Washington has passed multiple bipartisan deals with a split Congress. Gridlock can be a fiscal positive as the markets tend to perform best when the party that controls the White House and Congress are not the same.

We continue to believe U.S. Treasuries are considered to be the safest asset in the world. The Fitch downgrade is highlighting long-term political issues that are preventing the government from coming to agreements in a timely manner. There still is no substitute for U.S. Treasuries in the global financial markets, and the U.S. market remains the largest, most liquid and safest in the world.

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: Lord Abbett, Moody’s, Reuters, Schwab

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 S&P 500 closed higher for the fifth consecutive month; the odds favor a down month relatively soon. Historically, August has been a poor-performing month, ranking worse than only February and September going back to 1950.

If the markets do experience weakness in the coming months, investors may be surprised — and talking heads may say that they are finally right for saying that the market is due for a pullback. It may present buying opportunities for those with cash on hand, or it may be a challenge to refrain from panicking for those who get nervous when the market drops. Remember, most years see a temporary decline of 5% or more at least three times.

Pullbacks are common, and they should be expected. When they happen, many people tend to go straight to the worst-case scenario — that the sky is falling, and the market will never recover. Often, this can happen because of what people read or hear on the television. Many people may get in trouble because they extrapolate strength or weakness into perpetuity. They don’t believe that the trend will turn in a different direction.

The news can sway your outlook. Remember, most analysts or stock market predictors have an angle. They are not playing the long game and are focused on the short term. With our clients, we are focused on the long term, typically 10 years or longer. We are focused on whether you achieve your financial goals; the longer your time horizon, the higher the probability of success in the markets.

Time Horizon Matters

The chart below shows us another good way to look at the long-term picture: a rolling 30-year return of the S&P 500 (the blue line), compared to the latest one-year returns (the orange bars) for each 30-year period. 

Returns in any one year are all over the map. As we wrote recently, returns for any one year can vary from the average — but over the long run, the average return doesn’t change much from year to year. A one-year return can make you feel good or bad, but if you stay invested over the long term — and don’t sell out of the portfolio in a down year — it shouldn’t have much bearing on long-term results.

30-Year Returns vs. 1-Year Returns

The narrative of this year’s rally has changed over the last two months. This is no longer just a “Magnificent Seven” rally by the top tech giants. Resilient economic data in the U.S., receding inflation pressures and expectations for the Fed ending the rate-hiking cycle have led to a broader market rally since early June.

If we can avoid a hard-landing recession, the overall market valuation appears reasonable. The long-term average over the past 100 years for stocks has been about 10% per year. After the three and half years of this decade, we have experienced two bear markets and world-changing events, and the market is averaging slightly over 10% per year. We will continue to preach against making investment decisions based on one-year returns!

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: LPL, Carson, American Funds, A Common Sense Guide to Investing

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.