Valued Clients,
Our portfolios are generally at or near all-time highs.
There’s a lot going on in markets with both continued upside and risk potential.
This week, the major stock indexes were down for 5 straight days through Thursday, followed by Friday’s big gain after Federal Reserve Chair, Jerome Powell’s important annual Jackson Hole Economic Symposium Speech, signaled a virtual lock, that short-term interest rates will be reduced on the next September 17th meeting.
After Friday’s big up day of 1.9% both for the Dow and the Nasdaq and 1.5% for the S&P 500 the week ended at -.58% for the Nasdaq, +.27% on the S&P 500, and +1.53% on the Dow.
The benchmark 10 Year Treasury Bond interest rate declined about the same amount that stocks rose on Friday by 1.62% from 4.33% to 4.26%.
- Interestingly the market broadened out and the Dow hit its first record high since December 2024, while the Nasdaq and S&P 500 have been hitting new highs frequently.
- Surprisingly none of those Magnificent 7 growth stocks are in the top 10 market gainers year-to-date according to a CNBC recap.
- The best performers were interest rate sensitive asset classes and sectors such as small cap, real estate, utilities, financials, consumer discretionary, and energy all of which are well represented in our diversified portfolios as well as technolgy and growth.
Market Positives
- Lower interest rates are great for stocks, real estate, and the overal economy.
- Some economists are forecasting 2 to 3 quarter point interest rate cuts this year and potentially 5 by July 2026.
- Stock market momentum has been strong.
- Unemployment remains low at 4.2%.
- Artificial Intelligence (AI) can add to GDP growth and greater efficiency.
- Consumer spending (2/3 of the economy/GDP) and company earning have been resilient.
- Pro business tax, regulation, merger & acquisition, and domestic production policies could propel stocks further.
Market Risks
- Inflation is currently 3%, well ahead of the Fed’s 2% target and it could get worse as tarrif reality kicks in.
- Higher inflation could cause the Fed to do fewer future rate cuts.
- While short-term rate cuts are a positive as is a steeper yield curve, the longer term market driven benchmark 10-Year U.S. Treasury Bond interest rate is much less predictable since less international demand and higher supply to fund our high deficits could push those rates higher which has a big impact on mortgages, auto loans, credit card rates, and business loans.
- Also if longer maturity bond interest rates goes higher, bonds become a bigger competitor to stocks for investor funds lowering stock demand and share prices
- Stocks remain richly valued with forward P/Es at 21, 24, and 29 for the Dow, S&P 500, and Nasdaq respectively.
- The big risk is staglation such as in the 1970s when we had had slow ecomic growth with higher inflation creating a negative environment for consumer and business spending, translating into lower corporate earnings and stock prices.
Strategy
- With a lot of news and data driven market moves likely, we will continue to thoughtfully and strategically take advantage of both selling and buying opportunities.
- Combining growth with high tax-advantaged income has allowed us to perform very well while focusing on risk management.
- The goal continues to be total growth with a balance of appreciation and tax-advantaged income.
- This market has been generous in buy low – sell high opportunities, and I think that will continue.
- In addition to increasing our gains by selling previously underwater lots at break-even and making new buys at lower prices, our downside should be lower than the overal market and especially the again richly valued high flyers of the Nasdaq (QQQ) and Vanguard Growth index (VUG) that had a major 33% valuation decrease in 2022.
Enjoy the weekend,
John