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[Market Recap] Cup of Joe: September Market Update

Stock Markets cooled off in August

The August decline seems to be not such a bad thing. Not a good thing, per se, but good in the sense that it may be healthy for the market.  Staving off the proverbial irrational exuberance and keeping expectations in check.

• The S&P 500 was +20.6% through July 31st.  On pace for a calendar year return of +35.4%. That has happened only 5 times since the Great Depression, and the last time was in 1958. So a year like this would be exceptional.

In our opinion, one good thing about the market repricing in August is that it seemed to happen on its own, it was not caused by any surprise headlines or negative reports.

• The August cool-off also happened with a very average amount of volatility, average by historical standards.
• Except for a three-day period right in the middle, the daily moves were mostly in bite sized chunks, which is nice to see.  This is also good for the investing mentality, because it keeps the financial media quiet which prevents either our Fear or FOMO reactions from flashing red.
• A market moderating itself on its own isn’t always a bad thing because it keeps expectations in check and mitigates the amount of emotional frenzy we experience.

What this August performance could also be signaling is that the Fed is still in the driver’s seat. Market participants were seemingly watching the data roll out and gauging the potential signaling of if-you-give-a-mouse-a-cookie will it end up with the Fed hiking rates more or pausing for a while.

A big positive right now is:

• Job market has remained strong and the Unemployment rate has remained low.
  Employed workers fuels spending which fuels corporate profits.
  Corporate profits are the main driver of long term stock prices.

Thank you for your continued trust and partnership. 

Joe Gallemore, CIMA®, Partner

[Market Recap] Cup of Joe: August Market Update

Stock indexes posted strong gains in July. US Large cap and International stocks were up over 3% and US Small Cap and Emerging Market stocks were up more than 6% during the month. Primarily led by the Fed’s pause on interest rates in June, and the continued trickle of positive data on the economy. 

In the first half of the year, performance of the S&P 500, and arguably the market at large, had been dominated by large tech stocks.
Large Growth stocks have been on a white hot tear this year returning over 33% in the first 6 months.This started to turn over a bit in July.The S&P 500 Equally-Weighted Index returned slightly more than the traditional S&P 500 Index in July (3.5% vs 3.2%). This performance shift is a good thing for diversified portfolios because it means that a broader range of stocks performed well, as opposed to a small few.  
 
The “so what” of all this. How does this apply to me?
Not focused on growth or large growth. This, like everything else, goes through cycles. It has been in favor in recent history because of suppressed interest rates. Large Growth was -30%+ in 2022… because interest rates went up, fast.
 
Diversification:
A portfolio of 60% SP 500 & 40% Barclays US Aggregate Bond indexes is +13% year to date. According to JPM, a broadly diversified allocation of about 8 different asset classes is +10.7% YTD as of 7/31.The goal of diversification is not keeping up with a specific equity index.If you’re retired or in the later innings of your career, you’re going to have exposure to bonds, for income and risk control. Bonds are up barley 2% this year because they’ve been going through a rate hiking cycle and inflation (a bond’s worst enemy) was generationally high last year.
 
So,Knowing you have a diversified portfolio…
When you hear, “The NASDAQ is up for 13 straight days!” know they’re not talking about you.  When you hear, “Equities are favored to bonds!”, just think to yourself “well I use bond to control risk in my portfolio, and they’re now paying me more than they have in 20 years.” And when you hear talking heads explaining why pockets of the market are ripe for bursts of performance, just remember that market timing has been all but proven impossible, and pursuing it is a fools errand.
 
Thank you for your continued trust and partnership.