As we conclude the third quarter, financial markets continue to exhibit resilience. Interest rates have marginally decreased, the S&P 500 has surged over 20% ytd, yet the media cycle remains rampant with pessimism, particularly surrounding the November election.
While we've discussed market psychology in previous rantings, now feels like a perfect time for a refresher. Investing, after all, is a long-term journey. Markets, by nature, will periodically test our resolve. There are moments when you might think, “I’ve gained too much, it’s bound to correct,” or conversely, “I’ve lost too much, it’s never going to recover.” Layer on top of that a divisive and toxic political landscape, and it's easy to see why one might feel apprehensive about the future. Fear, uncertainty, and doubt are constantly being fed to us, making it difficult to stay the course. However, rather than focus on extreme "tail risks", which make for great news stories, or speculating about the worst-case scenarios, let’s look at the current state of markets, and shed some historical light on things.
Over the last two years, the Federal Reserve has battled a historically high inflation rate, the likes of which we haven’t seen since the 70s. To combat this, they aggressively raised short-term interest rates from near 0% to 5%. This monetary tightening had a pronounced effect on all asset classes. The gains many markets experienced coming out of the pandemic were erased throughout 2022. Yet, as we’ve moved through 2023 and into 2024, we’ve seen a steady recovery across the board, with most sectors regaining and even surpassing prior levels.
This brings us to today, where the Fed reversed course and reduced short-term interest rates by 50 basis points. This marks a potential shift toward the first true easing cycle since the 2008 financial crisis. If history is any guide, the start of an easing cycle could signal new opportunities for growth, particularly for equities and other risk-on assets.
To further contextualize this, I’ve included a chart that illustrates the performance of the S&P 500 following the first rate cut in previous cycles. While every market environment is unique, the data suggests that rate cuts are often followed by periods of strong performance in equity markets.
Source: Ned Davis Research, Patient Capital, Bloomberg. Past performance no guarantee of future results. Investments cannot be made directly in an index.
Aside from the early 2000 tech crash and the great financial crisis, the S&P 500 produced double digit annualized returns over the long-term.
Now, you might be thinking, “This all sounds promising, but isn’t the Fed cutting rates during an election cycle, with markets already at or near their all-time highs, a concern?” It’s a valid question. After all, with the S&P 500 hovering within record territory, one could argue that much of the anticipated future gains tied to rate cuts are already priced in.
To explore this further, I found a chart that specifically analyzes forward returns when the Federal Reserve cuts interest rates while the S&P 500 is within 5% of its all-time high.
Again, pretty good. Six out of seven times the stock market was higher 36 months later when the market was close to all-time highs.
This is good news for investors. Most of the time, things have worked out just fine when the Fed cuts rates close to all-time highs.
However, providing caution, here’s an incomplete list of what makes this situation unique:
We’re still normalizing from the pandemic.
There were trillions of dollars in government spending.
The stock market has been in a ~15 year bull market and continues to reach all time highs.
Interest rates have been all over the map.
The U.S. has experienced just two months of recession since June 2009.
We have multiple wars occurring throughout the globe
The 2024 election is a couple of weeks away.
The key takeaway here is that for every positive in the market, there can just as easily be a negative. This is why maintaining a prudent, well-balanced investment strategy is essential. It's crucial to understand your personal financial situation and stay focused on the actions necessary to achieve your specific goals, rather than being swayed by short-term market movements or external noise.
Frank Vance
Retirement Capital Advisors
800 Battery Ave SE
The Battery, Suite 100
Atlanta, GA 30339
Office- 412-722-3795
frank@retire-me.com
Securities and Advisory Services offered through Commonwealth Financial Network®, member FINRA/ SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. All references to markets, stocks, equity, small cap, mid cap, bonds, interest rates, or any other term are notional and for educational and discussion purposes only.
This material is intended for informational/educational purposes only and is theoretical. It should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investing entails risk of loss and no guarantees are implied or suggested. Please contact your financial professional for more information specific to your situation.