HAPPY THANKSGIVING
Today, we pause to reflect on all weâre grateful forâfamily, friends, and the moments that bring us together.
Here at Minich MacGregor Wealth Management, we are thankful for our relationships with our clients and for the opportunity to help you however we can.
We wish you a day filled with love, laughter, and, of course, delicious food!
Most of us know somebody whoâs served in the military or did so ourselves. For those who havenât, it can be difficult to understand what itâs like to serve. Itâs easy to forget the many sacrifices that our service men and women make. Hopefully, we all take the opportunity this Veterans Day to thank our soldiers, both past and present, for the courage they show(ed) in the face of the unimaginable. So, if you see a soldier, or someone who once was a soldier, please say:
Thank You.
Thank you for all that you do, and the sacrifices youâve made. Thank you for leaving your friends and the comforts of home. Thank you for risking your lives, so that we can enjoy ours. Thanks for giving up the small moments in life: inside jokes, Super Bowls, backyard barbeques, and fishing trips. Thank you for allowing us to have our small victories, homecoming games, homeruns, touchdowns, dance recitals, first kisses, and first drinks. Thanks for giving us the opportunity to sleep soundly in our beds; to go to work and provide a life for our families.
Thank you for being dignified and respectful while representing our nation. Thank you for having your fellow soldiersâ backs; for suffering, bleeding, and in far too many cases, dying for our way of life. Thank you for being willing to endure cold nights, cold food, hard cots, and blisters. Thank you for coming home and doing your best to fit in, to not jump when a pot falls on the floor, or when the neighbors set off fireworks. Thank you for going through more than you thought possible. Thank you for your lost friends and comrades. Thank you for all the things we understand, and for everything we donât.
Happy Veterans Day!
The only bad question is the one left unasked. Thatâs the premise behind many of our posts. Each covers a different investment-related question that many people have but are afraid to ask.
To begin this post, weâd like to ask you a question: Have you ever seen an episode of Star Trek? If so, you know the writers often use something called âtechnobabble.â Youâll hear terms like dilithium core, temporal convergence, tachyon fields, and more. Itâs obvious, of course, why the writers would do this. As the show takes place in the future, technobabble is a quick and easy way to make the characters seem smarter and more technologically advanced than we are today.  Â
The media has its own form of technobabble. If youâve ever watched CNBC, for example, youâve probably heard many instances of âfinancial jargon.â Words that sound complicated and intimidating, and that you almost never hear in everyday conversation. Many do have meanings, and some are very important â but they can often be bandied about by professionals in order to sound sophisticated.
Sophistication is all well and good, but not when it comes at the expense of clarity. So, over the next few posts in this series, we want to break down some common bits of financial jargon that you are likely to hear in the media, what they mean, and why they do â or do not â matter.Â
Questions You Were Afraid to Ask #14:
What do stock ratings mean?
Buy. Sell. Hold. Overweight. Outperform. Strong, weak, reduce, accumulate. These are just some of the ratings youâll often see attached to specific investments, usually stocks. Financial websites love to list them. Talking heads on TV love to recite them. But what are they?
A rating is an analystâs recommendation on what to do with a particular stock. Typically, an analyst will research a company by reviewing financial statements, talking with leadership, and surveying customers. Some analysts will also study broader economic trends to try and estimate how the company will be affected by the overall economy. Other analysts may rely heavily on algorithms and mathematical models. Whatever their method, these analysts then prepare a report that discusses how they see the companyâs stock performing in the near future.
Inside that report is a rating. Their advice, distilled down to a single word or phrase, on what their clients should do with the stock in question. The three most basic ratings are: buy, sell, and hold.
Buy and sell are fairly obvious. They are recommendations to buy the stock â or buy more of it â or to sell whatever shares you already own. âHoldâ essentially means to sit tight. If you already own shares in the stock, donât buy any more, but donât sell, either.
So far, so simple. But hereâs where things can get a little tricky. Since there is no standardized way to rate stocks, pretty much every financial firm will have its own system. Thatâs why youâll often see many variations and degrees of those three basic ratings. For example, think of buy, sell, and hold as umbrella terms. Beneath the buy umbrella, you may sometimes hear terms like moderate buy, overweight, outperform, market perform, add, or accumulate. Under sell, you may see reduce, underweight, underperform, weak hold, moderate sell.
âModerateâ essentially means to buy or sell more shares of the stock, but not too much. Same for add/reduce. Over/underweight and over/underperform means the analyst believes the stock will perform somewhat better or worse than the overall market. Weak hold is basically a push â itâs probably fine to hold onto your shares, but you can sell if you want to.
Sometimes, if an analyst uses all these variations, then a simple buy or sell can then take on a new meaning. Thatâs why youâll sometimes see the terms strong buy or strong sell. This indicates the analyst believes you should either buy or sell as much of the stock as you possibly can.
So, now you know what stock ratings mean. But do they matter?
Imagine youâre shopping online for a new coffee maker. Whatâs the first thing youâd see? Likely, it would be a list of coffee makers with some sort of numerical rating next to each based on all the customer reviews. Now, would you buy the first machine that has a good rating? Probably not. What you would do is look at the first machine with a good rating, and then go from there.
For regular investors, thatâs essentially what stock ratings are good for. They provide a handy place to start. A quick reference. A way to weed out the stocks you donât want to look at immediately versus those you do. But you shouldnât ever make decisions based solely on those ratings. Because, like the customer ratings online, they donât tell the whole story.
Itâs important to remember that a stock rating is just the opinion of one analyst. Others may have different opinions. Also, because thereâs no standardized rating system, one analystâs âbuyâ might be anotherâs âhold.â An âunderperformâ at one place might be a âstrong sellâ at another. And while analysts can be very smart and experienced, rating is not an exact science and can be often used more as a marketing pitch than as a truly objective evaluation.
Finally, stock ratings are not specific to you. Consider the coffee maker analogy. One machine might have a rating of 4.3 stars; a second might be 4.0. But when you read the reviews closely, you might see the higher-rated machine is versatile but complicated. The lower-rated machine canât do as much, but itâs fast and easy â perfect for that quick cup before work. If thatâs what you want, the âlower-ratedâ machine might be better. Stock ratings are similar. They donât address your goals, your risk tolerance, your timeline. And thatâs why they should never be used as a substitute for having your own customized investment plan.
So, thatâs the skinny on stock ratings. Next month, weâll look at another stock term: Big Caps vs Small Caps. Have a great month!
Our 2024 Q4 Market Outlook: looking back on the 3rd quarter, then looking ahead to what could impact the markets over the next few months.
Itâs always great to start a message with the words, âThe markets finished the quarter at an all-time high.â Fortunately, thatâs the case this time around. The S&P 500 rose 2% in September, and 5.5% for the entire quarter. The Dow, meanwhile, gained 8.2% in Q3. Both indices set new records along the way.1Â
So, letâs do a quick recap of why the markets performed the way they did over the last three months. Then, weâll tell you what we think might be the most interesting storyline from an investorâs perspective. Weâll finish with a few things to keep an eye on as we draw closer to the end of the year.Â
July
The quarter began with the markets already rebounding from a bout of volatility in early Q2. This was driven by good news regarding inflation, with consumer prices dropping to 3% in June.2 That led to renewed optimism that the Federal Reserve would finally cut interest rates sometime in the summer. But as July started making way for August, the skies over Wall Street began to turn cloudy. The optimism of a future rate cut shifted into concern that maybe, just maybe, the Fed had already waited too long. Â
August
This concern was primarily driven by rumblings in the labor market. Unemployment has been trending upward for some time now, and in July, the jobless rate rose to 4.3%.3 While thatâs not a high number in a historical context, it was still higher than most economists expected. And it prompted investors to wonder whether future rate cuts would be enough to prevent unemployment from rising higher still, which could trigger a recession.Â
Just as investors were chewing over this unpleasant bit of data, the markets were hit by another interest rate whammy â this time, from overseas. While our rates have been at 40-year highs in recent times, Japan has kept their rates extremely low. Because of this, many investors were using a tactic called the yen carry trade. This involves borrowing Japanese currency at an absurdly cheap rate, then converting that cash into a stronger currency. With that stronger currency, investors could then buy U.S. securities, essentially at a discount. Itâs been a popular tactic, but it unraveled in early August with the news that Japan was finally raisinginterest rates at the same time the U.S. was preparing to decrease theirs. That meant the yen was stronger in value than before. As a result, many investors were forced to quickly sell off the assets they bought before having to pay higher interest rates on the money they borrowed. This triggered a short but massive selloff across the entire globe.Â
All this was unpleasant, but thankfully, short-lived. By the end of August, the markets had completely regained what they had lost. Still, a sense of uneasiness remained, because September had arrived â historically, the worst month of the year for the markets.Â
September
True to form, the markets began the month with another dip. Besides worrying about unemployment, investors were also mulling over the future of artificial intelligence. (More specifically, the companies that have invested heavily in it.) AI-related hype has been one of the biggest drivers of the current bull market, but far more money has been poured into AI than has flown out of it. Some analysts raised the question of whether the new technology is all itâs cracked up to be, and whether it will truly return enough value to shareholders to justify its costs.Â
But then came the news everyone had been waiting for. The August jobs report was modestly positive, indicating that unemployment was basically unchanged. (In other words, still higher than anyone would like, but not picking up momentum, either.) And the latest inflation report was even better: Inflation had fallen to 2.5%.4  The lowest mark since early 2021âŠand very close to the Fedâs goal of 2%. A rate cut was now all but certain. And on September 18, it finally happened. The first cut in over four years, to the tune of 0.50%.4 Based on this, the markets continued to climb, finishing the quarter at record highs.Â
So, an action-packed quarter, with plenty of twists and turns. But as much fun as it is to say, ârecord highs,â that may not even be the best news to come out of Q3.Â
Warren Buffett once said that interest rates act like gravity on valuation â meaning they pull stock prices down, or at least prevent them from rising too high. But despite higher rates, stocks have been in a bull market for the past two years. How can this be?Â
When we talk about âthe stock market,â we tend to think of it as a single entity. But thatâs far from the truth. As its name implies, the S&P 500 is made up of five hundred different companies, and the broader stock market contains thousands. At any given time, some of those companies are rising in value while others are falling. When more companies rise than fall, the markets do well, and vice versa. But sometimes, you donât need a lotof companies to rise in value. You just need a handful to rise so much, they drag the overall value of the index along with it. Thatâs been the case for much of the past two years. Most of the marketâs rise has been driven by a handful of tech giants, thanks to the AI boom we mentioned. But for the majority of companies on the stock market, growth has been much more modest. Interest rates act like gravity, remember?
One of the most interesting storylines is that this trend reversed last quarter. More than 60% of companies in the S&P 500 rose higher than the overall index in Q3.5 (For the previous quarters, it was only around 25%.) And the Russell 2000 index, which contains lots of smaller companies, rose by 9.3% for the quarter.5 All this suggests that the bull market is widening in breadth, which is a positive indicator for the future. (The broader a market incline, the longer that incline tends to last.)Â
Now, with all that said, there are still some question marks on the horizon that we need to keep an eye on. While geopolitics rarely has a sustained impact on the markets, conflict in the Middle East could inject turbulence into oil prices, which do affect the markets to a degree. Volatility can always spike in the weeks before and after a presidential election.  And the biggest question mark is unemployment. Can the Fed actually achieve a soft landing, avoiding a recession as they continue cutting rates? These are the questions that only the future can answer.Â
For these reasons, itâs important we remain prudent with our investment decisions in the short-termâŠwhile always keeping our focus on the long-term. In the meantime, enjoy the upcoming holiday season! And as always, please let us know if you have any questions or concerns. Our door is always open.  Â
SOURCES:
1 âS&P 500 ekes out record closing high,â Reuters, www.reuters.com/world/us/wall-st-eyes-lower-start-data-loaded-week-powells-comments-awaited-2024-09-30/
2 âInflation falls 0.1% in June from prior month,â CNBC, www.cnbc.com/2024/07/11/cpi-inflation-report-june-2024.html
3 âJob growth totals 114,000 in July,â CNBC, www.cnbc.com/2024/08/02/job-growth-totals-114000-in-july-much-less-than-expected-as-unemployment-rate-rises-to-4point3percent.html
4 âFed slashes interest rates by a half point,â CNBC, www.cnbc.com/2024/09/18/fed-cuts-rates-september-2024-.html
5 âBroadening gains in US stock market underscore optimism on economy,â Reuters, www.reuters.com/markets/us/broadening-gains-us-stock-market-underscore-optimism-economy-2024-09-30/
As we enter the fourth and final quarter of the year, itâs time once again to talk about checklists. Because if thereâs any time to use them, itâs now! After all, âŠ
Heâs makinâ a list
and checkinâ it twice
Heâs gonna find out if youâre naughty or nice.
âSanta Claus is Cominâ to Townâ â J. Fred Coots & Haven Gillespie
Now, we apologize for putting Christmas music into your head when weâre still a couple of months away. But we do it to make a point: Checklists are so important, even Santa Claus uses them! And if theyâre good enough for Kris Kringle, theyâre good enough for us.
As the year winds down, there are many things we can do to strengthen our finances and move closer to our long-term goals. So, to help you close out 2024 with a flourish and build momentum to next year, weâve created a short âQ4 Financial Checklist.â It contains five tasks to accomplish before the end of the year.
Now, donât worry! None of these items are difficult. One or two may not even apply to you; others you may have done already. But if you put them all together, we think youâll find they will go a long way to making your finances â and your holidays â just a little merrier and brighter.
As always, please let us know if you need help or have questions about any of these. In the meantime, we wish you a great fourth quarter!
In just about every scary movie, thereâs always that one scene near the end where the hero thinks theyâve escaped, or that the monster is dead â only for there to be one more âjump scareâ in store.
This is the scenario currently facing the Federal Reserve.
Over the last two years, the Fed has been trying to do the seemingly impossible: Cool down consumer prices without starting a recession. To do that, the Fed turned to the only tool available to them: Interest rate hikes. Rates began gradually rising in early 2022 and had been at about 5.33% since August of last year.1 That was the highest theyâd been in 23 years.1
Higher interest rates serve as a kind of flame retardant on the overall economy because they make it more expensive for consumers and businesses to borrow money. This, in turn, reduces how much money people spend. Since a consumer spending is a corporationâs income, lower spending forces companies to lower their prices to attract new business. When this happens across the board, inflation will cool to a more manageable level.
This approach works, but the problem is that itâs applying a blunt instrument to a delicate situation. Since 1955, virtually every period of major rate hikes has led to a downturn.1 If prices cool down too much, too fast, businesses stop hiring. Next, they start laying off workers to make up for the decrease in revenue. The economy contracts, and we have a recession. Some of these recessions were very short, but every downturn is painful in its own way. So, bringing down inflation without bringing down the economy? History suggests it canât be done.
But the data weâre seeing now suggests that this time, the Fed may have just done it.
Since the rate hikes began, inflation has fallen from a high of 9.1% in 2022 to 2.5% this past August.2 Thatâs extremely close to the Fedâs stated goal of a 2% rate of inflation. Meanwhile, the economy has so far avoided a recession. Our nation’s GDP grew by approximately 1.4% in the first quarter of this year, and 3% in the second.3
But in a scary movie, the characters who gloat or celebrate too soonâŠthey never make it out, do they? Itâs the ones who keep their heads and donât get carried away who make it to the credits.
So, the Fed canât celebrate yet. Just in case the monster isnât really dead.
You see, while inflation has been going down this year, something else has been going up: Unemployment. After falling to a near-historic low of 3.4% in April 2023, the jobless rate has been slowly but consistently climbing. (The most recent jobs report, in August, showed unemployment was at 4.2%.)4 Now, this isnât a large number. In historical context, itâs quite low. But what matters is the trend, and the trend has undoubtedly been going up.
Because of these twin factors â declining inflation, rising unemployment â we’ve known for a while that the Fed must begin cutting interest rates. The question was when, and by how much. Well, now we know the answer: September 18, and 0.50%.5 Itâs the first cut in over four years, and it brings rates down to a range of 4.75-5%.
Investors have been waiting expectantly for this for pretty much the entire year. Itâs one of the main reasons the S&P 500 has done so well in 2024. So, the move itself wasnât a surprise. What was a little surprising, though, was that the Fed cut rates by 0.50%. That may not sound impressive, but itâs larger than the 0.25% cut many analysts expected. And it illustrates the new challenge our country faces: How do you cut rates in a way that prevents runaway unemployment without letting inflation climb again?
In other words, how do we ensure the monsterâs truly dead? How do we avoid another jump scare?
You see, if the Fed cuts rates by too much, too fast, it could prompt a surge in borrowing and spending. That could overheat the economy and cause prices to spike again, undoing all the progress weâve made. On the other hand, if the Fed cuts rates by too little, too slowly, it may be too little, too late for the labor market. Unemployment could turn into a runaway train, drawing the economy behind it. The war on inflation would still be wonâŠbut at what cost?
As investors, one of the issues we face is that thereâs no reliable way to know exactly what will happen. Right now, the economy appears to contain more positive signs than negative, and this new rate cut is a very welcome development. However, itâs worth remembering that rises in unemployment often precede a recession. Furthermore, many past recessions began just after the Fed began cutting rates, not while they were hiking them. When the Fed announced the rate cut on September 18, they also suggested that further, smaller cuts are in store this year. While the markets have embraced the news, and may well continue to rise, we must be mentally prepared for bouts of volatility as investors parse every bit of data for signs of either rebounding inflation or runaway unemployment.
Fortunately, we are set up to respond appropriately to any signs of volatility. Moving forward, as the Fed begins cutting interest rates at last, weâll continue to analyze how both the overall market â and the various sectors within the market â are trending. As you know, we have put in place a series of rules that determine at what point in a trend we decide to buy, and when we decide to sell. This enables us to switch between offense and defense at any time. If our technical signals indicate itâs time to play offense and seize future opportunities or play defense to protect your gains, we can do so without waiting to see what the overall markets will do.
So, as we move into October, we want you to focus on what really matters. The fall colors. Pumpkin lattes and pumpkin carving. Go watch a real scary movie if thatâs your thing.
Are you doing everything you can to help your story contain the words, âHappily ever afterâ?
Let us help you. For our clients, we monitor the markets, track the data, and adapt as necessary so they need never worry about jump scares.
As always, please let us know if you have any questions or concerns. Have a great week! Â Â
SOURCES
1 âFederal Funds Effective Rate,â Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/FEDFUNDS
2 âThe Consumer Price Index rose 2.5 percent over the past year,â U.S. Bureau of Labor Statistics, https://www.bls.gov/opub/ted/2024/the-consumer-price-index-rose-2-5-percent-over-the-past-year.htm
3 âGross Domestic Product (Second Estimate), Second Quarter 2024,â U.S. Bureau of Economic Analysis, https://www.bea.gov/news/2024/gross-domestic-product-second-estimate-corporate-profits-preliminary-estimate-second
4 âThe Employment Situation â August 2024,â U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf
5 âFederal Reserve issues FOMC statement,â Federal Reserve Board of Governors, https://www.federalreserve.gov/newsevents/pressreleases/monetary20240918a.htm
Happy Labor Day!
Most of us associate Labor Day with BBQs, parades, and weekend camping trips. But the more we learn about the holiday, the more we realize that itâs really a celebration of things we take for granted yet couldnât imagine living without. And itâs a commemoration of the men and women who risked their lives, liberty, and reputations to secure them for us.
For instance, take the eight-hour workday, the current standard in the United States.1
Everyone has different careers and work schedules. Some are incredibly demanding and long. Others are on swing shifts. But for many Americans, the day looks like this: get up, eat breakfast, and see children off to school. Go to work, break for lunch, work through the afternoon, and then head home in time for dinner. Itâs a simple thing, this schedule. But itâs a schedule that enables us to keep our bodies fueled, hydrated, and rested. A schedule that allows for time to attend our loved onesâ school plays and soccer games. A schedule that affords more time for recreation, relaxation, and self-improvement.
But it wasnât always this way.
The year was 1835. The location: Philadelphia. Throughout this enormous city â indeed all throughout the country â workers knew only one sort of workday.
They called it âsun to sun.â
The moment the sun crested over the horizon each day; tens of thousands of laborers were already at work. Shoveling coal. Laying bricks. Painting houses, driving carts, unloading boats, and a hundred other tasks. They would work, often under hazardous conditions and for little pay until the sun finally went down. During the summer, this could mean up to 15 hours per day, leaving them no opportunity to see their families or do much of anything. The winter workday, in contrast, was comparatively short â at around 9 hours per day â but it also meant an enormous drop in pay or routine unemployment. Neither situation was acceptable for someone trying to feed their family. To make matters worse, the toil of a sun-to-sun day led to a laundry list of physical ailments. Workers routinely suffered âswollen ankles, nervous headaches, lung disease, stomach problems,â and much, much more.
Then, one day, a letter arrived from Boston. The city that helped launch the American Revolution was requesting help from the city that had declared American Independence. Laborers there â primarily carpenters, but soon masons and stonecutters, too â were done with this unfair system. They were demanding their rights as workers, citizens, and human beings for something better.
We have been too long subjected to the odious, cruel, unjust and tyrannical system which compels the operative mechanic to exhaust his physical and mental powers. We have rights and duties to perform as American citizens and members of our society, which forbid us to dispose of more than ten hours for a dayâs work.2
Essentially, Boston workers were calling for a citywide guarantee of a 10-hour workday regardless of the season. And they were asking laborers in other cities to call for the same thing.
The letter quickly gained traction in Philadelphia, circulating from worker to worker with astonishing speed. (These days, weâd call it âgoing viral.â) For them, the demands in the letter were not just about having more time off. They were about ensuring the means to become better citizens and more productive members of society. As the letter from Boston had proclaimed â and as the Philadelphia workers then repeated â âWe have taken a firm and decided stand to obtain the acknowledgement of those rights to enable us to perform our duties to God, our country, and ourselves.â3 So, in May, three hundred coal workers decided to go on strike. Together, they marched on the coal wharves and announced that no coal would be unloaded until a 10-hour workday was established.
This was not an easy decision. For any worker to go on strike was to risk not just their current job, but their entire future. Livelihoods and reputations could be ruined forever if the strike was not successful â and up to that point in American history, few strikes had been. In many cases, strikes could lead to injuries and even death. Nevertheless, the coal workers were quickly joined by almost every other laborer and tradesman in the city. The words in the Boston letter became a topic discussion in every tavern and meeting house. Altogether, over twenty thousand workers began marching around the city, carrying banners that said, âFrom 6 to 6, ten hours work and two hours for meals.â
The movement was so organized, united, and swift that within three weeks, the old sun-to-sun system was out. The ten-hour day became standard throughout the city. In addition, many workers also gained an increase in their wages. But the movement didnât stop there. The news quickly spread to every corner of the country, and by the end of the year, workers from New England to the Carolinas had conquered the old system. A system that âleft no time for mental cultivation and kept people ignorant by keeping them always at work.â3 A system that was âdestructive of social happiness and degrading to the name of freemen.â3 In its place was a new system. One that had âbroken [peopleâs] shackles, loosened their chains, and made them free from the galling yoke of excessive labor.â 3
The rights won in 1835 laid the foundation for the rights we enjoy today. An eight-hour workday. The right to take vacations or medical leave. To care for our bodies properly. To see our families. To learn, live, and worship however we see fit. Rights we cannot live withoutâŠand which were secured for us by people who simply wanted a better future for themselves and their children.
And that, to us, is what this holiday is all about. We wish you a happy Labor Day!
Looking back on the quarter that was and ahead at the quarter that is to become better-informed investors.
One of our favorite metaphors for investing is that itâs like packing a suitcase.
Letâs say youâre preparing for a summer trip to the beach. What would you put in your suitcase? A swimsuit, probably. Sandals. Sunscreen. Plenty of shorts and t-shirts. Sunglasses and a hat. Then, when you take a step back, you realize you still have space for a few more items. What do you choose? More beach gear? Makes sense â after all, itâs the middle of summer, and your destination is famous for being the perfect place to work on a tan.
Or would you pack a pair of pants and a long-sleeve shirt because you guess it might get cold at night? Would you tuck in an umbrella and fold up a ponchoâŠjust in case it rains?
In our experience, some investors are like the tourist who packs for one kind of weather and one type of activity. To illustrate what we mean, letâs recap how the markets performed last quarter.
When 2024 began, inflation was near its lowest point in two years. As a result, many investors figured prices would continue to drop, and the Federal Reserve would lower interest rates sooner rather than later. (And possibly even several times throughout the year.) In other words, they âbankedâ on warm weather and sunny skies, then packed their suitcase accordingly.
Well, thereâs nothing more frustrating than when unexpected rain ruins fun in the sun. Instead of falling, inflation ticked up through Q1, rising from 3.1% in January to 3.5% in March.1
As a result, when the second quarter began, the mood on Wall Street had shifted substantially. Suddenly, there was no more talk of the Fed cutting rates early and often. Instead, investors began to wonder if the Fed would cut rates at all in 2024. Some economists even speculated that the Fed might raise rates again. So, investors re-opened their suitcases. Out went the swimwear; in went the coats and gloves. It’s no surprise, then, that the S&P 500 dropped 4.2% in April.2
What these investors didnât realize was that the sun was already starting to peek out from behind the clouds.
Fast-forward to the beginning of July. Looking back, we now know that inflation dropped to 3.4% in April, 3.3% in May, and a surprising 3% in June.1
A big reason for this slide is due to gas prices, which fell by 3.6% in May and 3.8% in June.3 (Energy prices in general fell by 2% in both months.3) This helped negate the fact that food and housing prices â two of the most stubborn and volatile drivers of inflation actually went up slightly in June.
As you can imagine, the talk has turned once againâŠto whether the Fed will cut rates sometime in the summer. This renewed optimism, combined with another factor that weâll get to, helped lift the markets out of the doldrums. For the quarter, the S&P 500 gained 3.9%, while the Nasdaq rose 8.3%.4
A 3% inflation rate means that consumer prices are up only 3% compared to this same time last year, not that prices have fallen lower. Inflation is the rate at which prices are increasing. A lower inflation rate means that prices are rising more slowly; deflation is when prices actually dropâŠand itâs usually the sign of an unhealthy economy.
So, what does this mean going forward? Is it time to repack the suitcase?
The answer is no â because we believe we packed it correctly the first time.
Any savvy traveler knows that when you pack a suitcase, you donât just factor in what you think will happen. You pack for what could happen. If your goal is to hit the beach, you pack a swimsuitâŠbut since you know it could rain, you also pack a poncho. Your plan is to feel sand between your toes, but if the beach is too crowded, youâll go for a hike insteadâŠwhich is why you pack shoes as well as sandals.
The way inflation has gone (up and down) and the way the markets have responded (ditto) shows exactly why investing isnât about predicting what will happen. Itâs about planning for what may happen. You pack a suitcase in a way that ensures your vacation will be fun no matter what. We base our investment strategy in a way that helps you keep working toward your goals, regardless of what short-term market conditions are like.
The fact of the matter is we donât know whether the Fed will lower interest rates in Q3. Of course, itâs certainly possible that they will. Three straight months of declining consumer prices is certainly a good sign. Even better is that the economy has continued to be solid. (GDP grew by 1.4% in Q1.5 As of this writing, many economists are predicting a 2% rise in Q2.6) But itâs also possible that a rate cut is still many months away. Trying to guess what will happen in the short-term â and then making moves that could impact you in the long-term â is bad packing.
Then, too, inflation and interest rate expectations are not the only drivers of the markets. Tech stocks â specifically those companies most involved in the development or utilization of AI â helped the markets regain momentum in Q2. Any investor who decided to sit on the sidelines because of pessimism over inflation would have missed out on the optimism surrounding AI. Sure, itâs always a bummer to go to the beach and find it rainingâŠbut there are often plenty of other fun things to do on your vacation even when the sun isnât out
When you think about it, the markets really are like going on a trip. There will always be reasons for enthusiasm and reasons for caution. Everyone who goes to Disneyland can look forward to amazing rides and horrendous crowds. The view from the Grand Canyon is spectacular; the weather can be abysmally hot. The flowers in England are spectacular; the rain can feel oppressive.
And for every factor that can pull the markets down, there will be factors that could push the markets up. Our job is to help you pack a suitcase â and implement an investment strategy with an eye on the long-term forecast â that keeps you prepared for all of it.
So, as we move further into a new quarter, that is just what our team will continue to do. Weâll be keeping an eye on many things this quarter. Inflation, the breadth of the market, the upcoming election â you get the idea. And whenever we feel thereâs something on the horizon that could affect the items in your suitcase, weâll let you know immediately.
In the meantime, if you ever have any questions or concerns, please let us know. And if you have any upcoming summer travel plans, wellâŠbe sure to send us pictures!
Have a great week!
1 âInflation falls 0.1% in June from prior month,â CNBC, https://www.cnbc.com/2024/07/11/cpi-inflation-report-june-2024.html
2 âS&P 500 falls 4.2% in April,â S&P Global, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-500-falls-4-2-in-april-as-market-momentum-loses-steam-81466397
3 âConsumer Price Index Summary, U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
4 âStops dip as investors digest inflation data,â Reuters, https://www.reuters.com/markets/global-markets-wrapup-1-2024-06-28/
5 âGross Domestic Product,â U.S. Bureau of Economic Analysis, https://www.bea.gov/data/gdp/gross-domestic-product
6 âGDPNow,â Federal Reserve Bank of Atlanta, accessed July 10, 2024. https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf