Fed's first rate cut in four years. It was a rocky start to September. Nvidia plunged 9% on the very first trading day of the month. Roping in the last week of August, investors dumped stocks at their fastest pace since November 2020. Selling was led by institutional investors and hedge funds. Although to be fair, ETFs saw unusually high inflows throughout August.
Why the selloff in stocks? The latest economic data – especially regarding the labor market - implied slowing growth for the U.S. economy. Fears reemerged that the Fed was behind the curve and the U.S. was heading for a recession. That’s right – recession. The boogeyman that refuses to die and haunts and taunts investors until sleep is elusive and portfolios can only be opened in the company of a stiff drink.
Why the selloff in stocks? The latest economic data – especially regarding the labor market - implied slowing growth for the U.S. economy. Fears reemerged that the Fed was behind the curve and the U.S. was heading for a recession. That’s right – recession. The boogeyman that refuses to die and haunts and taunts investors until sleep is elusive and portfolios can only be opened in the company of a stiff drink.
What in blazes is it going to take to relieve this torment?
Oh, right. A rate cut. That should do it.
Inflation vs. Unemployment
Mark down September 18, 2024 in your mental calendar next to anniversary, baby’s birthday, and the time Beth Bennett said you had chicken legs in high school. That’s the date the Federal Reserve cut interest rates for the first time in four years, putting an end to its longest cycle of rate hikes in roughly a decade. And cut them by a hefty half percentage point.
The Fed has a dual mandate of low inflation and high employment, and they face trade-offs when trying to achieve those goals. If they raise interest rates to cool down the economy and tame inflation, it may increase unemployment. And vice versa. With the Fed’s long-term target for inflation approaching its goal, and the labor market softening, a pivot was in order.
At the news conference post decision, Fed Chair Jerome Powell acknowledged that job growth has slowed. "Clearly, payroll job creation has moved down in the last few months and that bears watching," he said. "The upside risks to inflation have really come down and the downside risks to employment have increased."
But he added the economy and job market are still on solid footing.
"Our intent with our policy move today is to keep it there," he said. "The time to support the labor market is while it's strong, not when you start seeing layoffs... You can take this as a sign of our commitment not to get behind."
The Reaction:
Economists, analysts, and assorted talking heads were in general agreement: this was good news.
What exactly will a 50 basis point interest rate cut mean for the economy? While not immediate, expect these – and subsequent - rate cuts to eventually lower the cost of credit, impacting mortgage rates, car loans, and the interest charged on credit cards. And if the cuts get more money flowing through the economy, that can translate into expansion for businesses.
But of course, there’s a trade-off: it also will trim bank savings account yields that had finally provided significant returns for savers.
By the end of the month, all three major indices were looking higher, with the Dow Jones Industrial Average notching an all-time high on Friday.
What Does October Look Like?
In a word: volatile. Historically speaking, October is the month with the greatest average stock market volatility. And this year in particular, we’re just days away from a pivotal U.S. Presidential election with potential ramifications for a number of industries and the market in general.
Beyond the election, the market will remain especially vigilant toward any economic data that could push back against hopes for a soft landing. Adding to the uncertainty, a port strike looms on the East and Gulf coasts, and international tensions seems to escalate daily.
Acknowledging that there are always risks, I remain guardedly optimistic.
And For What It’s Worth…
Driverless cars have been causing sleepless nights in San Francisco. Waymo, the self-driving car division of Google’s parent company Alphabet, has been testing its autonomous rideshare service on the streets of San Francisco for some time. Then came a safety update that makes them honk when other cars get too close. That’s good, you want that - except for an unintended consequence in crowded parking lots.
It seemed that whenever a Waymo car reversed into a parking space, any already parked robocars that were close by would start honking. And if the parking lot is a staging area for Waymo cars, where the little buggers go between trips and during charging, the honks would become an incessant chorus. [CollisionRepairMag.com]
Nearby residents, driven batty, began complaining. Alphabet promised a software fix; it failed to solve the problem. In a gesture of peace, Alphabet offered ice cream to the residents. And yet – surprise - the complaints continued. Finally, a month into the problem, a second software fix appears to have done the trick. Residents can now get a little sleep. Although they will have to go out and pay good money for their own ice cream.
Life is a series of trade-offs.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
Oh, right. A rate cut. That should do it.
Inflation vs. Unemployment
Mark down September 18, 2024 in your mental calendar next to anniversary, baby’s birthday, and the time Beth Bennett said you had chicken legs in high school. That’s the date the Federal Reserve cut interest rates for the first time in four years, putting an end to its longest cycle of rate hikes in roughly a decade. And cut them by a hefty half percentage point.
The Fed has a dual mandate of low inflation and high employment, and they face trade-offs when trying to achieve those goals. If they raise interest rates to cool down the economy and tame inflation, it may increase unemployment. And vice versa. With the Fed’s long-term target for inflation approaching its goal, and the labor market softening, a pivot was in order.
At the news conference post decision, Fed Chair Jerome Powell acknowledged that job growth has slowed. "Clearly, payroll job creation has moved down in the last few months and that bears watching," he said. "The upside risks to inflation have really come down and the downside risks to employment have increased."
But he added the economy and job market are still on solid footing.
"Our intent with our policy move today is to keep it there," he said. "The time to support the labor market is while it's strong, not when you start seeing layoffs... You can take this as a sign of our commitment not to get behind."
The Reaction:
Economists, analysts, and assorted talking heads were in general agreement: this was good news.
- “This will improve the material well-being of all Americans,” said Joe Brusuelas, chief economist at accounting firm RSM US. “We had three years of extremely aggressive policy out of the Fed. We’re now pivoting toward the normalization of rates in the post-pandemic economy.”
- “Lower rates should bring billions more in long-term investments off the sidelines,” said Michael Madowitz, principal economist at the Roosevelt Institute, “and create thousands more long-term jobs.”
- "This was the best news I've heard from the Fed in years," said Jeremy Siegel, professor emeritus at University of Pennsylvania's Wharton School of Business.
What exactly will a 50 basis point interest rate cut mean for the economy? While not immediate, expect these – and subsequent - rate cuts to eventually lower the cost of credit, impacting mortgage rates, car loans, and the interest charged on credit cards. And if the cuts get more money flowing through the economy, that can translate into expansion for businesses.
But of course, there’s a trade-off: it also will trim bank savings account yields that had finally provided significant returns for savers.
By the end of the month, all three major indices were looking higher, with the Dow Jones Industrial Average notching an all-time high on Friday.
What Does October Look Like?
In a word: volatile. Historically speaking, October is the month with the greatest average stock market volatility. And this year in particular, we’re just days away from a pivotal U.S. Presidential election with potential ramifications for a number of industries and the market in general.
Beyond the election, the market will remain especially vigilant toward any economic data that could push back against hopes for a soft landing. Adding to the uncertainty, a port strike looms on the East and Gulf coasts, and international tensions seems to escalate daily.
Acknowledging that there are always risks, I remain guardedly optimistic.
And For What It’s Worth…
Driverless cars have been causing sleepless nights in San Francisco. Waymo, the self-driving car division of Google’s parent company Alphabet, has been testing its autonomous rideshare service on the streets of San Francisco for some time. Then came a safety update that makes them honk when other cars get too close. That’s good, you want that - except for an unintended consequence in crowded parking lots.
It seemed that whenever a Waymo car reversed into a parking space, any already parked robocars that were close by would start honking. And if the parking lot is a staging area for Waymo cars, where the little buggers go between trips and during charging, the honks would become an incessant chorus. [CollisionRepairMag.com]
Nearby residents, driven batty, began complaining. Alphabet promised a software fix; it failed to solve the problem. In a gesture of peace, Alphabet offered ice cream to the residents. And yet – surprise - the complaints continued. Finally, a month into the problem, a second software fix appears to have done the trick. Residents can now get a little sleep. Although they will have to go out and pay good money for their own ice cream.
Life is a series of trade-offs.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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