This edition of Market Watch will focus on the macro economy and what we are currently keeping a close eye on. Our general sentiment is summed up well in this quote from Paul Hickey on a recent episode of Charles Schwab’s podcast, On Investing: “We’re bullish on America. It’s been the right bet for the last almost 250 years now. So, I think in that respect, you can’t go wrong betting on America and the US economy and how strong it has been and how strong it’s likely to continue being”. (Episode Link)
Our only election commentary will be a reminder that long-term buy and hold strategies massively outperform entering and exiting the market based on politics. The chart below shows the growth of $1 from 1961-2024.
Furthermore, the following chart shows the hypothetical stock market returns of investing only while one party is in office. The takeaway should be that staying in the market over time and taking a nonpartisan approach to investing astronomically outperforms.
This should serve as a reminder that timing the stock market is trying to bet on two points in time: your entry point and your exit point. It is very hard, nearly impossible, for investors to get this right.
Consumer Health
U.S. consumers are currently showing great signs of strength with their balance sheets and their behavior. Their words, however, often express caution and worry.
It is not surprising to see this. We have had a couple years now of media rhetoric questioning whether there would be a recession, and it is not uncommon in election years to observe this behavior.
Many individuals, whether they realize it or not, may be exhibiting a “wait and see” approach and holding excess cash on the side. As of October 24th, the Investment Company Institute reported that there is $6.5 trillion in money market funds (Source). Gold futures are up over 37% this year and hit a record high last week. Investors are holding cash in assets that provide them with a sense of safety right now.This should serve as a reminder that timing the stock market is trying to bet on two points in time: your entry point and your exit point. It is very hard, nearly impossible, for investors to get this right.
Many individuals, whether they realize it or not, may be exhibiting a “wait and see” approach and holding excess cash on the side. As of October 24th, the Investment Company Institute reported that there is $6.5 trillion in money market funds (Source). Gold futures are up over 37% this year and hit a record high last week. Investors are holding cash in assets that provide them with a sense of safety right now.
Putting it another way, the economy is holding its breath right now. We will likely see it exhale in mid-to late November and through the holiday season. This behavior cycle isn’t dependent on the election outcome, it is a cyclical pattern based on the unknown becoming known. And then once the unknown does become known, businesses and consumers adjust and forge onward.
Overall, the US households have strong balance sheets and are continuing to spend on retail, travel, and drive the economy.
We do not have immediate concerns of a recession in the short-term. It is hard to have a meaningful recession when consumers have cash on the sidelines and companies have earnings.
With that being said, we always stay vigilant for other risks that could be catalysts for possible market drawdowns. Two of the areas we always watch closely are environmental and geopolitical risks. For environmental, you can think of hurricanes Helene and Milton as the latest examples. And more local to us in the desert, wildfire risks and water shortages. The major geopolitical risk we are watching is the ongoing conflict in the Middle East. Oil prices are adjusting up and down right now as they price in the constantly changing probabilities (both up and down) of wider spread conflict in that region.
And note that we do not recommend trading based on geopolitics. By the time individual investors have time to react to a geopolitical event, the market has already moved and the investor is late. Geopolitics are just one ingredient among many other informed decisions in the portfolio construction process.
Interest Rates and The Federal Reserve:
We believe the U.S. Federal Reserve can move mostly sideways from here as they shift into maintenance mode and risk management. The Federal Reserve has two mandates: full employment and stable inflation. Economic reports lately are pointing to both of those objectives being fulfilled. September’s unemployment rate was 4.1% (Bureau of Labor Statistics) and the inflation rate was 2.4% (Bureau of Labor Statistics).
The 2.4% may seem low to you, especially when compared to what you have been seeing on your grocery receipts, insurance costs, utility bills, and so on. This is a year over year number in relation to September 2023. CPI is an economic indicator calculated based off a bunch of data from interrelated samples and surveys. It is an aggregate number and very well may differ from what you individually experience based on your own unique consumption basket. But CPI is the standard proxy and indicator the Fed has to guide their decisions.
As frustrating as inflation can be to us as consumers – remember, for the health of the economy we do not want prices to go down. We just want them to increase at a slower rate. If we see prices go down (deflation), that will probably mean we are dealing with a major hardship such as the Great Depression or Great Recession. We do not believe we are anywhere close to that; we are just sharing as a reminder to be careful what we wish for!
It is forecasted that the Federal Reserve will likely continue to lower rates. This is in line with the global macro economy as many other central banks across the globe have also started to cut rates.
The aggregate consensus forecast is: 50 basis point cut in November, four 25 basis point cuts in 2025, and another 50 basis point cut in 2026 to reach a long-term rate of 2.9%. Reality could differ from the forecast, as one of the Federal Reserve’s most powerful tools is their words. Sometimes even just postulating what they plan to do can create their intended impact on the economy before they even act.
We do not mind a slower moving Fed because that usually is a sign of a healthy economy. We will see what the Federal Reserve meeting on November 6th-7th brings.
We thank you all for taking the time and reading “Market Watch.” It is meant as an educational piece on the always evolving markets. It is something we plan on providing every month, and your feedback is very important to us.
On a personal note, RMH is now in the position to bring on new clients so please be sure to share this informational letter with whomever you wish. RMH’s focus is on the customizable investment needs of individuals, families, and foundations. We enjoy working with our clients to better understand their goals, values, and passions for what is important in their lives. In expanding our client base, we look forward to working with people who share these same desires.
Ashlyn Tucker, M. Fin, Analyst, CFA Level III Candidate
Richard Mundinger, CFA
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