Investors Hope the Fed Will Help Keep the Markets Calm This Fall
After rebounding from a rocky start in August, Wall Street started September with another big swoon. More volatility could lie ahead as the economy continues to slow, the presidential election draws closer, and the Federal Reserve finally gets ready to start lowering interest rates.
As you probably recall, the stock market started August with a three-day rout that culminated on August 5, when Wall Street had its worst day in over a year. Several factors likely triggered the sell-off, including the release of downgraded earnings projections from some of the Magnificent 7 tech companies, another disappointing jobs report from the Labor Department, and the surprise announcement that Japan’s Central Bank intends to start raising interest rates. While some volatility remained throughout the month, all three major indexes managed to finish August with slight gains: the S&P 500 added 1%, the Dow 0.6%, and the Nasdaq 1.1%.1
Then came September and it was déjà vu all over again. On September 3, the Nasdaq plunged by 3.3%, the S&P by 2.1% and the Dow by 1.5%, marking Wall Street’s worst day since… well, since August 5. Triggering factors this time included the release of new data showing that the U.S. manufacturing industry could be weakening and worries about how this month’s pending unemployment report could impact the Fed’s decision to lower or not lower short-term interest rates at their next meeting on September 18.2
Recession Worries
The bottom line is that investors are becoming increasingly concerned about a potential recession. At the same time, they are anxiously watching for signs that the Fed shares that same concern and will take the right countermeasures, at the right times, to support the weakening economy. The good news there is that at the Fed’s last meeting on August 23rd, Chairman Jerome Powell said “the time has come” for a rate cut based on cooling inflation numbers, the slowing job market, and other factors. Many economists expect the Fed will approve a rate decrease of at least .25% at their September meeting.3
But, of course, there’s no guarantee that will happen, and even if it does it won’t be a panacea for all the various worries weighing on investors as we move toward the final fiscal quarter of 2024. As noted, Japan’s intention to raise interest rates at a time when most Central Banks around the world (including ours) are moving to lower rates is a new concern, as are those downgraded 2025 earnings projections for several big tech companies, as well as many companies in other sectors.
As I also mentioned, the presidential race is also on the minds of investors and will increasingly be a concern as November draws closer. With Kamala Harris still carrying strong momentum, the prospect of a Democratic win means that an increase in the corporate tax rate – with a negative impact on earnings – could eventually be in store. In addition, there are, of course, still several geopolitical issues that could escalate and disrupt the markets at any time, in particular the ongoing wars in Ukraine and Gaza.
So, once again, investors have a lot on their minds and will be keeping a close eye on the Fed as the rest of the year unfolds. If they remain optimistic the Fed will make the right moves to keep the economy from falling into a full-blown recessionary spiral, the markets should remain relatively healthy. It would seem the bond market is already showing signs of optimism and has priced in the Fed’s first expected rate cut later this month. The interest rate on the U.S. 10-year treasury bond has dropped from just under 4% a month ago to 3.77% as of early September.4
Your Portfolios
Long-term rates will likely continue to trend downward once the Fed does start cutting short-term rates, which, of course, would likely mean an increase in the values of the individual bonds and bond-like instruments in the portfolios of fixed-income investors. Remember, however, that interest rates aren’t the only force that affects bond values. As I pointed out last month, going forward, those of you in our most conservative portfolios of bonds and bond-like instruments may, depending on your holdings, see your values impacted a bit by credit spread fluctuations once the Fed does start lowering rates, but the impact will likely be minimal.
Of course, the most important thing to remember, as I always stress, is that any fluctuations up or down in your asset values on paper are largely irrelevant when you’re investing for income because your interest and dividend return remain steady and unchanged regardless of market conditions.
With that in mind, I’m happy to report that thanks to the market’s August rebound, we are now on track with our portfolios to deliver an average income yield of 5-6.5%, net of fees, for the year, which is on track to slightly ahead of our target goal.
As always, if you have any questions about your investments or any other issue, please call our office at any time!
1 “Stock Market News, Aug. 30: S&P 500 Ends Rocky August with a Monthly Gain,” The Wall Street Journal, Aug. 30, 2024
2 “Wall Street Suffers Worst Day Since Early August Meltdown,” Washington Post, Sept. 4, 2024
3 “Fed Chair Powell Says ‘Time Has Come’ for Interest Rate Cut,” NBCNews.com, Aug. 23, 2024
4 MarketWatch.com
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