LIFE Newsletter October 2024
Navigating Life’s Journey
The goal of our LIFE Newsletter is to bring you a blend of wisdom, financial insight, and philanthropy. Our commitment to enriching lives goes beyond financial advice – we extend our support to meaningful causes, with each featured organization receiving contributions from Abound Financial.
In this edition, as always, you’ll find thoughtful reflections, in-depth investment insights, our ‘Faith in Action’ spotlight on a charity close to our values, and an economic update to keep you informed and prepared.
Together, let’s embrace the path to financial abundance and compassionate action.
Life Lessons
”Whoever pursues righteousness and love finds life, prosperity and honor.”
Proverbs 21:21 (NIV)
Investment Updates
Per LPL Research’s Global Portfolio Strategy Report – For complete copy of the report, click here.
INVESTMENT TAKEAWAYS:
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Stocks rose in August for the fourth straight month, supported by continued economic growth, accelerating earnings growth, and a broadening out of market performance beyond technology. The S&P 500 was more than 8% off its July 16 record closing high on its August 5 low before rallying to end the month to produce a 2.4% return. As September began, focus among market participants remained on upcoming Federal Reserve (Fed) rate cuts, the degree of softening in the labor markets, geopolitical risks, and leverage, which was a major contributor to the selloff in early August. Within fixed income markets, Treasury yields were lower in August as markets continue to expect deep rate cuts from the Fed, likely starting at the September Fed meeting. Current market pricing has the Fed cutting interest rates nearly 2% over the next 12 months as labor market weakness has become a larger concern for markets than inflation. The rate cutting expectations helped generate positive returns for most fixed income asset classes with the Bloomberg Aggregate Bond Index higher by 1.4% in August. High quality sectors, such as agency mortgage-backed securities and investment-grade corporate bonds outperformed. LPL’s STAAC maintains its tactical neutral stance on equities and modest overweight to fixed income, while actively monitoring signs of a potential stock market correction as the calendar turns to the historically weak seasonal month of September and the presidential election approaches.
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Economic growth in the U.S. should outperform other developed markets. Amid headwinds to consumer spending, solid business capital spending is expected to support overall domestic growth, albeit, potentially at below consensus levels. A 2024 recession is unlikely.
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The Committee remains comfortable with a balanced approach to market cap. High-quality small cap stocks are attractively valued, but large cap companies enjoy superior earnings power and tend to outperform late cycle as the economy slows.
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The AI-fueled earnings on the growth side helps justify rich valuations, but our technical analysis work has started to turn a bit toward value, which remains more attractively valued than normal. Staying close to neutral seems prudent.
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The STAAC’s regional preference remains U.S. over developed international and emerging markets (EM) due largely to superior earnings and economic growth in the U.S. and significant volatility in the Japanese yen.
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The STAAC continues to hold a strong overweight tilt in preferred securities as valuations remain attractive. However, the risk/reward for core bond sectors (U.S. Treasury, agency mortgage-backed securities (MBS), investment-grade corporates) is more attractive than plus sectors. In our view, adding duration isn’t attractive at current levels, and the STAAC remains neutral relative to our benchmarks.
This research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Faith in Action
Providing vital services and compassionate care to Sacramento’s homeless community, focusing on dignity and radical love:
Loaves & Fishes
Loaves & Fishes is a nonprofit organization in Sacramento, California, dedicated to providing survival services to homeless individuals and families. Founded in 1983 by Chris and Dan Delany, former Catholic activists, the organization began as a simple effort to feed the hungry with sandwiches from their car trunks. Over the decades, it has grown into a 4.5-acre campus offering 16 critical services. These services range from hot meals and survival supplies to mental health counseling, legal assistance, hygiene care, and educational support for homeless children. Loaves & Fishes serves nearly 1,000 guests daily with a focus on hospitality, dignity, and radical love, aiming to create a welcoming and supportive environment for all who seek help.
Their mission continues to be inspired by the Catholic Worker Movement’s values of justice and compassion for the poor. Today, Loaves & Fishes operates as a beacon of hope, offering not only basic needs but also a sense of community for the Sacramento homeless population.
If you would like more information or are feeling inclined to give to this cause you can find more information here:
Economic Update
Finally! For the first time in more than four years, on September 18, the Federal Reserve (Fed) cut interest rates. While the debate over how big the cut would be was settled (a half point, not a quarter), questions about where the Fed will go from here and what it might mean for the economy and markets will continue.
The Fed matters, but let’s consider the possibility it’s been getting too much attention. Since the Fed’s announcement, the 10-year yield has risen, not fallen. This move reflects the fact that the bond market had already priced in an aggressive rate cutting cycle — one that may take the Fed’s target federal funds rate from its current 5% down to 3% by the end of 2025. Unless a recession drags rates lower, which we don’t expect anytime soon, the boost to the economy from lower borrowing costs (e.g., on mortgage rates, auto loans, etc.) may be mostly behind us.
Stocks also factor in rate cuts in advance. The S&P 500 stock market benchmark gained 24% during this latest Fed rate pause (from the last hike on July 27, 2023, until September 17, 2024). That marked the best stock performance during a Fed pause in at least 50 years, covering nine cutting cycles. But now that rate cuts have begun, history tells us more modest returns may be in store. On average, during the year after initial rate cuts, stocks produced only mid-single-digit returns.
The economy is the key to better potential returns. During the first year of a rate-cutting cycle accompanied by a growing economy, (e.g., no recession) stocks tend to generate above-average gains. The S&P 500 gained 14% on average during those 12-month periods. If a soft landing is achieved — perhaps more likely than not, but not assured — further gains for stocks could lie ahead.
Even if recession risk is low, policy risk is high with the November election just a month away. The uncertainty around policy outcomes has historically caused market volatility in the weeks leading up to elections. Stocks did just fine this September, gaining 2% during the historically weak month. The steady rise suggests markets are focused more on the still-growing economy, falling inflation, and rising corporate profits. However, with several trillion dollars of expiring tax cuts to be negotiated next year, unsustainable deficit spending as far as the eye can see, and tense trade relations with China, don’t be surprised if market volatility picks up — regardless of what happens on November 5.
The bull market will likely continue as the economy expands, but a pullback is likely overdue. Stocks reflect a lot of good news. The policy and geopolitical backdrops remain challenging. Job growth is slowing, and the cumulative effects of inflation have taken a toll.
As always, please reach out to me with questions.
Sincerely,
David Laut
CEO, Certified Financial Planner™
O / 916-846-7780
A / 4180 Douglas Blvd. Suite 200, Granite Bay, CA 95746
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of June 6, 2023.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at
lplresearch.com/definitions.
