By mid to late summer, it appeared the Bull Market that began in the Fall of 2023 was losing steam. The S&P 500 Index declined by 8.5%, in large part due to what is referred to as the Japanese yen carry trade, but we won’t detail that here.
By the end of Q3, just a month later, major market indexes were nearing fresh record highs. Going into the quarter Investors were of course anticipating an inflation reading that would allow the Fed to finally cut interest rates. And the Fed did just that, in dramatic fashion. In part due to a jump in the unemployment rate and continued cracks in domestic manufacturing. Both signs the domestic economy was cooling. Those readings, coupled with a Consumer Price Index (CPI) year-on-year of 2.5% in August, the lowest since May 2020, led to action.
The result, a 50 basis point cut to the Fed Funds Rate in September, the first since the beginning of the Covid Pandemic and the largest cut since the 2008 financial crisis.
“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”
Furthermore, Fed chair Jarome Powell indicated additional rate cuts before the end of the year. In a nutshell, both equity and fixed-income markets reacted favorably coming out of August and through to the end Q3. It is worth noting that most central banks around the world, including here in the U.S. have moved to a ‘neutral’ if not ‘easing’ stance in terms of monetary policy moving forward. Chair Powell now seems more focused on supporting the labor market, and less so on combating inflation, all in an attempt to pull off the so-called soft-landing scenario.
For our clients all of the above led to returns that kept pace with or exceeded that of the broader market. Those in our Tactical Allocation Portfolio (TAP) experienced a full model reallocation in August in a move away from sector-based Exchange Traded Funds (ETFs). Instead implementing equity exposure with a heavier emphasis on individual equities that represent those same sectors. We do not take model reallocation lightly and this was the first fundamental change to any of our models since 2018. As always, we used our data driven approach and robust back-testing system to identify new areas of strength, and to price and size new securities accordingly.
Our fixed-income approach did not waver with U.S. Treasury yields at attractive levels in existing November and May maturities. There will come a time to revisit relatively risk-free U.S. Treasuries and we have already prepared a model allocation of fixed-income securities. We will trade fixed-income similar to TAP and Sector Equities (SEC EQ) models’ equity exposure when that time comes. If rates stay near current levels our intent is to roll the November maturity back into the U.S. Treasury market but are of the opinion by May yields will become far less attractive forcing us back into a more active approach. We will certainly notify our investors when that time comes.
Overall, the firm is healthy and want to thank all of you, and for your patience, as we have rolled out several pieces of new technology this year. We are confident our online data gathering, whether for planning or new account opening, a new scheduling assistant and soon to be a new client reporting and trading system will all add value moving forward. We strive to be ahead of the technological curve, but of course change comes with a few growing pains. We value your feedback and welcome questions, comments or concerns. In addition, if you are not a regular reader of our Weekly Market updates, we have added a new Planning & Resources section and encourage you to take a look. If there are topics you would like covered please do not hesitate to reach out to [email protected].
As we make the final push towards year-end we remain confident in the approach and look forward to connecting with each of you again soon.
