The third quarter of 2024 proved to be strong for risk assets and more conservative fixed income instruments alike, although these returns were generated against a backdrop of elevated volatility. The S&P 500 index ended the quarter up over 5%, marking its 4th consecutive quarter of positive returns. Equities were backed up by strong returns in the bond market, which were up over 5% as well – bolstered by an easing interest rate environment after the Fed elected to cut rates by 0.50% in their September meeting. While seeing green across the board is an encouraging sign for most investors, we expect to see an elevated level of uncertainty through the end of the year – and short-term volatility may pick up as we get closer to the presidential election and the Fed determines their future path for interest rates. However, these uncertain economic environments can prove to be nothing to worry about (and perhaps uncover opportunities) for a well-disciplined long-term investor.
The September Fed meeting represented a significant shift in monetary policy, as Jerome Powell and the FOMC determined that inflation has begun to trend down toward their long-run target of 2%. They opted for a 0.50% interest rate cut, which was on the more aggressive side of analyst estimates at the time – but showed that the Fed has confidence in inflation being back under control in a sustainable fashion. Declining interest rates can serve as a tailwind for stocks and bonds alike for a few key reasons. On the equity side, lower rates allow companies to borrow money more easily with more favorable loan terms – encouraging business expansion through the initiation of new projects and supporting profit margin through a lower interest expense. Fixed income asset prices have an inverse relationship with interest rates over the long term, meaning bond asset prices are likely to rise as interest rates fall. Finally, from an individual consumer/investor standpoint, lower interest rates encourage spending (which can help grow the economy and GDP). Credit card and loan interest rates decline in tandem with the fed rate, and low risk fixed interest rate vehicles like savings accounts, CDs, and money market funds also see rates decline – both of which encourage consumers to spend/invest their cash rather than save it. For those keeping track, we have already seen the Schwab money market fund lower its yield from 5.1% to 4.7% in recent weeks.
The election in the US has also been heating up, as we are now under a month away from electing our next president. While the race looks pretty close right now, it is important to keep in mind that historically the political party in control of the White House has had very little impact on market returns (and one party does not significantly outperform the other). We may see a short-term spike in market volatility as we approach election day, but over the long term the market has shown that it is party agnostic. Any significant policy changes that will affect the economy in a meaningful way are likely to take a long time to implement and should be well telegraphed and priced in by the market gradually over time. We feel the most prudent decision investors can take at this time is to keep a long term view and avoid making any dramatic shifts to portfolios based on emotional response or predictions regarding the outcome of the election.
See more about the election here.
As far as your portfolio at Relevé is concerned, we have implemented a new technology fund over the past couple of weeks – the BlackRock Technology Opportunities Fund (BGSIX). We feel that the continued growth of technology and AI-based equities coupled with the easing monetary environment makes this a great entry point for this fund. On the fixed income side, we are maintaining a near benchmark-neutral stance on duration that we initiated in the fourth quarter of last year, which we feel will position portfolios well to participate in gains through the fixed income markets if interest rates continue to decline as the Fed intends. Please don’t hesitate to reach out if you have any questions about our new technology strategy or would like to discuss your portfolio further!
Questions? We’re Here to Help
If you have questions about the current economic environment, our investment philosophy, or your portfolio, please feel free to reach out!
Jake Fromm | Lead Investment Analyst, CFS® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.