September 30, 2024

As Summer turns to Fall, you’re planning and investment team at Align is charting a course through the changing financial landscape. In this month’s update, we will share some relevant insights from the latest economic data and market trends that bring definition to investment decisions.

Stocks and Bonds Carry On

U.S. stocks are off to their 3rd best start to a presidential election year, with the S&P 500 up 19.5% through August. Historically, strong momentum in the first 8 months of an election year has carried through the rest of the year with an average 8.2% return over the following 4 months. September has also been slightly better for stocks in election years compared to non-election years.  Meanwhile, bonds have fronted an impressive rally as well. The Fed rate cut with no recession in the following 12 months has historically been good for both stocks and bonds. Flexible bond strategies have held up well during the big swings in interest rates over the past year.

Sidelined Cash

Despite strong returns for stocks and bonds, investors have continued to pile into money market funds with assets reaching a record $6.6 trillion in August. Sitting in cash has caused investors to miss out on the equity rally with the S&P 500 returning over 20% in the past year. Bond funds have also outperformed money markets with most beating the taxable money market average over the past year. Please see our February 27, 2024 article addressing this issue.  Looking back, a diversified 60/40 portfolio of stocks and bonds had outpaced money market returns over the past two years. Looking forward, as the Fed begins cutting rates, investors may be enticed to move some cash off the sidelines and back into risk assets.

Inflation and the Fed

The announced 50 basis-point Fed rate cut in September, along with a flattening yield curve, point to easing inflation pressures ahead which is great for households and businesses. In fact, key inflation drivers like shelter costs have historically fallen as the yield curve normalizes from an inverted to a flat shape. Moreover, businesses look favorably on lower lending rates and lower input costs. A rate cut could spur a new business cycle and advance the economy.

Labor Market Concerns

While the economic data is pointing to a soft landing, there are some concerns beneath the surface, particularly around the labor market. The unemployment rate has been ticking up and jobs are becoming less abundant. Further deterioration in employment, especially for lower-income consumers who have depleted excess savings, could lead to a sharper pullback in spending. We think the Fed will need to be cautious in its rate cutting path to allow for a gradual cooling of the labor market rather than a more abrupt downturn. This is a key indicator that we will be watching carefully in the months ahead. In the meantime, we will maintain our asset allocation viewpoints for the foreseeable future with an eye towards a shift to domestic growth sometime in the new year.

Fun Fact

September was the 7th month in the Roman calendar until 153 BC and its name comes from the Latin word “septem” meaning seven. It only became the 9th month when January and February were added to the beginning of the year. The Roman Calendar: From Romulus to Caesar (thetimenow.com)

*All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.