The Investment Committee met on the afternoon of Monday, December 4th. We were happy to have the opportunity to review and share the information that was gleaned from the economists and market strategists followed by our team members.
November witnessed a sharp reversal in global stock markets. After peaking in late July, the market had pulled back from August to October eventually falling more than 10% across the board. As a reminder, temporary dips like this are nothing new as the market has averaged an intra-year pullback of approximately 14% annually since 1980, as you can see in our chart below.
Optimism grew in both stock and bond markets during November. This was primarily driven by a growing belief that the Federal Reserve Bank is done raising interest rates. Over the last 18 months, the Fed has raised interest rates at their fastest pace in nearly 40 years. Their goal was to slow both economic growth and inflation, which also reached 40-year highs.
The stock market moved up more than 10% from its October 28th low. Not to be outdone, the bond market saw 10-year treasury rates, which briefly touched 5% in late October, fall to less than 4.5% in less than 30 days. Interest rate moves like this are dramatic and have created an unusual amount of volatility in the bond market. Please remember that as interest rates fall, bond prices rise. The combination of rising stock and bond prices led to one of the best months we have seen for diversified portfolios in nearly 30 years.
There is a growing hope that the Fed will be able to achieve a soft landing, in which economic growth and inflation pressures slow without tipping the economy over into a full-blown recession. However, there are also many economists who believe that the lagged effect of higher interest rates, slowing job growth, along with the Index of Leading Economic Indicators dropping for 19 consecutive months will eventually lead to an economic slowdown. We also see signs of stress in the consumer sector, as excess savings have been spent down and credit card balances and credit card default rates have been rising, as you can see in the charts below. This still leaves the likelihood of a shallow recession sometime in 2024 on the table.
It is important to remember that rising interest rates don’t impact individuals or corporations immediately, unless they have floating-rate debt, such as credit cards or revolving lines of credit. Most of the time, rising interest rates eventually impact people when they need to make a large purchase, such as an appliance or vehicle. They also hit corporations when they need to refinance existing corporate credit lines. This is why there is often a lag of one to two years from the time the Fed starts raising rates until a recession unfolds.
When there is such sharp disagreement and disparate outlooks from economists and market strategies, it typically leads to sharp moves, both up and down, in financial markets. This should remind us of two things. First, it is very difficult to successfully time moves in stock and bond markets. This is recently illustrated by the number of economists who, when the 10-year Treasury hit 5% in late October. This led many to forecast that interest rates would continue rising to 5 1/2%-6%, only to see rates reverse dramatically lower over the next 30 days.
Secondly, it should remind us that your investment portfolio and asset allocation should be driven by your financial plans and goals, not day-to-day economic or investment headlines. Your financial advisor has helped you craft an investment portfolio to meet your family's unique goals. Unless something has changed with those goals or objectives, your financial plan should act as your true NorthStar and guide your day-to-day thought process and decisions.
As always, the investment committee stands ready to adjust our model portfolios, if conditions warrant additional actions. We will continue to watch and monitor closely to help you, our trusted friends and clients, grow and protect the hard-earned assets that you have entrusted to us. It is a responsibility we take seriously, and we appreciate your confidence. As always, if you have questions, please reach out to your advisor, we are here for you.
INVESTMENT COMMITTEE MEMBERS:
The views stated in this piece are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.
Past performance does not guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
There is a growing hope - December Market Update
December 07, 2023