Seasonal weakness -have you heard this term over the last couple of months from the financial news media? Did you know that historically, two of the worst performing months for the S&P 500, the Dow 30 and the Nasdaq Indices are August and September? Yes, we reviewed financial markets data from 1945 through last year and most market corrections (a decline in equity markets of up to 10%) generally start in the late summer months culminating in the undisputed worst month for stocks, being September.
This trend, known as seasonal weakness, has proven to be the case again this year with the Dow, S&P 500 and Nasdaq Indices declining -0.21, -0.19 and -2.68% from August through yesterday September 5th. Although September has started off on shaky ground, we still have very respectable gains year to date on all three indices of 8.14, 16.48 and 14.1%. Here’s the good news, October, November and December are historically the best months for equity returns and we believe the remainder of the year should be no different.
If the above two paragraphs seem familiar to you, it’s because I’ve taken this excerpt word for word from my September 2023 note with the only change being updated performance numbers for the 2024 current year -highlighting the fact that despite the looming uncertainty of the upcoming Presidential election, a slowing labor market and high interest rates it’s business as usual for markets. History never repeats itself, but it does often rhyme, which bodes well for the remaining three months of the year if the seasonal trend stays intact.
This morning, we received the August non-farm payrolls report which showed an increase of 142,000 jobs last month -lower than the 160,000 expected by Economists. In addition, the July number was revised down which now gives the Federal Reserve enough concrete data to start their interest rate cutting campaign.
Given this morning’s data, we now expect a 50-basis point interest rate cut (.50%) on September 18th. We believed the Fed should have cut by .25% in July (missed opportunity), and the .50% cut this month is both a .25% catch up along with the current .25%. As a refresher, the Fed uses interest rates as a tool to slow or speed up the economy and now that inflation has largely been reined in, the Fed needs to lower rates fairly quickly (in our eyes) to avoid the continued slowing of the economy and tipping us into recession.
Looking forward, a lower interest rate environment is beneficial to individuals, corporations and of course the housing market. For the last two years, high interest rates have been a headwind for the economy but as rates decline this headwind should gradually turn to a tailwind.
So, you may ask yourself, how do stocks and bonds perform historically in a falling rate environment? Great question, generally, stocks outperform during periods of falling interest rates. We reviewed the performance of the S&P 500 Index going back to 1954 and found that the index has returned on average 12.6% over the following 12 months after the first interest rate cut.
As for bonds, remember, prices and bond yields move in opposite directions. When interest rates move down, so do yields. That means lower rates are likely to reward investors with rising bond prices but the tradeoff will be lower yields going forward.
This is the reason we have been extending maturity dates on individual bonds maturing or being called within portfolios in an effort to lock in higher rates as overall yields drop. For retirees relying solely on bond income to supplement their retirement this environment can be challenging, which is why we always recommend a diversified allocation of high-quality dividend paying stocks in addition to growth stocks to offset any potential decline in portfolio income with capital appreciation over the long term.
On August 30th, Reuters reported that assets in U.S. money markets and cash alternatives hit a record of $6.24 trillion. Over the last two years investors and savers alike have been spoiled with 5% money market, CD and T-Bill rates. These rates will soon be eroding with every Fed rate cut and at some point, those assets will need to be moved to alternatives offering a higher return. Arguably, a portion will find its way into the equities and bond markets over the next 12 months, which we feel is another positive catalyst not necessarily baked into forward-looking market returns.
Our next note will be the first week of November (before the election) and we do plan to discuss how the upcoming election and the various proposed economic policies could affect portfolios and markets. However, we are still two months away, things seem to change daily and we feel it’s best to save our analysis for a later date as the race firms up.
As always, we wish you and your family a great Friday evening, and a wonderful weekend!
Please reach out to us with any questions or comments you may have regarding your specific situation.
Jaran C. Day, Chief Investment Officer
Griffin Dalrymple, CFP®, Chief Strategy Officer
Past performance is not indicative of future performance.
The views expressed represent the opinion of Opinicus and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Opinicus’s view as of the time of these statements. Market performance cited is not indicative of portfolio performance experienced by portfolios Opinicus manages. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.