Are We Heading Back to Normal?
Very few things are certain in life, but the markets seem to be quite sure the Federal Reserve will begin to lower its Fed Funds Rate in September. This past week the Producer Price Index came in less than expected (that’s good!) and the Consumer Price Index, CPI, also came in lower than expected – up a more normal annualized 2.9%. Stocks are up and the yield on a wide spread of bonds is down, which means their values are up.
So “Good News” is back to being just that – good news.
So “Good News” is back to being just that – good news. Inflation coming down without significant damage to the economy or to the labor market IS the very definition of a Soft Landing. So far – Good Job, Fed.
Volatility has not left us, however, as two weeks ago reminded us. While the down days are difficult to experience, we believe markets are now poised to benefit from the Fed’s recent indication they are “open” to reducing rates in September. We agree with many commentators that it is unlikely there will be only one cut, but rather a series of gradual cuts over the next three to six months. This can only be good news for both equity and bond markets. The outlook would need to change in a substantial way to veer away from the expected move to cut in September.
Bonds are back to being a hedge against equity declines.
Their total return will not be as eye popping as the equity markets have generally delivered this year, but the fixed income portion of the portfolio should provide, according to Dan Ivascyn of PIMCO in a recent interview, “attractive returns in the base case, [and] they should begin to exhibit those diversified qualities that have really strengthened the case for them to be in an investor’s portfolio.”
We should expect to see the economy slow. Various commentators have suggested 2% GDP growth down from over 3% is in the cards for 2025. Slowing is NOT a recession, however. As long as we have an economy that is fully employed, and retail sales (as reported last week) are up, we should expect our consumer driven economy to remain in a positive trend for the near future. This is good news for both our equity and fixed income positions.
And a quick word about the election in November –
There will be very little effect on markets until we get into 2025, we see who is in charge, and we get a sense of the administration’s policies. Speculation in advance of an election or allowing politics to dictate an emotional trade is never good investment management. We will remain focused on the economic drivers of our clients’ portfolio positions.
To get a better fix on the economic trends which will effect our portfolios, be sure to pencil in our next Quarterly Market Outlook call on October 11, 2024 at Noon. A registration link will be available one week prior here.
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The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.
