Investment
Commentary

Q3 Market Update with Steve Cavalieri

Welcome back, everyone! Steve Cavalieri here, Chief Investment Officer at Summit Financial Strategies. As you can see, it’s beard-growing season again. Every year, I try to time it perfectly with the weather changing from hot summer to cool fall. But despite my five weather apps and all the technology at my disposal, it never fails—I start it too early, and then end up suffering through sweltering conditions. This got me thinking about how similar this is to people trying to predict market movements. Investment professionals, financial media, and investors alike often miss the mark, just like my beard-growing timing.

Lots of people were concerned about 2024. It’s an election year, and returns were impressive in 2023. A few clients asked me then – joking hopefully – time to sell it all? And here we sit with one quarter left in the year with many stock indices at or near all-time highs. Year-to-date, large-cap stocks are up about 22%, mid caps and international stocks are up 13%, small caps are up 11%, and domestic bonds are up 4 and a half. 

Even though it was a little rocky in July and August, all five of our primary asset classes had a strong third quarter. Drilling into the quarter reveals a change in leadership. Small caps led the way, up about 9%, followed by mid caps and international equities, both up 7%. Large-cap stocks, which have been dominant since the end of 2022, were actually the equity laggards this quarter, up 6%, with bonds just behind at 5%.

So, I mentioned some volatility in the quarter. Let’s talk about that a little bit. What happened? Well, the Fed met on July 31st to decide whether to cut the target for the federal funds rate, but they ended up leaving the rate unchanged. Then, two days later, the non-farm payrolls report came in, showing that the U.S. economy added 114,000 jobs in July, significantly below the market expectation of 175,000 jobs. The combination of this weaker-than-expected labor data and the fact that the Fed’s next opportunity to cut the target rate was two months away induced some short-term volatility to markets.

At the same time, the Bank of Japan’s decision to raise interest rates caught many by surprise, causing the Yen to jump, and leading to a sharp unwind of the Yen carry trade. This deleveraging forced large institutional investors to sell into already volatile markets, resulting in the largest ever two-day drop in the Nikkei. The turmoil spilled over to global markets, causing widespread volatility and declines. Despite these short-term shocks, the Nikkei rebounded nearly 25% over the next month, and the S&P 500 was back to the highs by the end of August. 

We’ve been talking for nearly 3 minutes, and I haven’t mentioned “inflation” yet! Which is a significant deviation from prior updates given its dominance in headlines for the past 3 years. On September 18th, the Fed cut rates by 50 basis points. Jerome Powell, the Chair of the Federal Reserve, highlighted that with inflation declining and the labor market cooling, the Fed’s dual mandate of maximum employment and price stability is now roughly in balance stating they are equally attentive to both. He emphasized the labor market remains strong, and the U.S. economy is in good shape.

This is one of those times we often discuss, when watching the market and the news day-to-day can be a stress-inducing activity without a whole lot of benefit. Trying to time the market with all the available data and technology is a futile endeavor. It’s a reminder that the best strategy is to stay the course, follow your Investment Policy Statement, and not get too caught up in predicting every twist and turn.  Your Summit team is here to guide you through the markets, where the only certainty is uncertainty. Thanks for tuning in, and remember, whether it’s your beard or your investments, patience pays off more than timing.  See you next time.