August 2024 Monthly Review

A Look Back

The above title by the Beatles is certainly not their most well-known or most popular, but it might be one of the more practical when talking about everyday life…or in this case, the economy and the financial markets. Written by Paul McCartney in 1968, he said it was inspired by the sight of a road stretching up into the hills in the remote lochs and mountains in Scotland. Released in May 1970, a month after the Beatles break-up, the song marked their 20th and final #1 hit in the U.S. For some reason, my 16-year-old son has shown a liking for the music and we heard the song as we went through their unbelievable catalog. It struck me as a perfect metaphor for where we are in the financial markets. We do not have enough space in this one-pager to properly talk about all of the events and factors that have taken place over the last several years that have contributed to where we are today. There are many. The economic outcome and subsequent government and private response have driven inflation, interest rates, and even stock prices higher over the last several years. It’s been a windy road for sure, but we ended August only a couple percent off all-time highs in the S&P 500 and other stock indices. For the month, the large-cap index was up nearly 2.5%, and 19.53% year-to-date! International stocks performed even better, while small-cap domestic stocks languished. Maybe most importantly core bonds, as measured by the Bloomberg Agg, had a strong +1.44% return, and the one-year number of 7.3% represents a sneaky, better-than-historical type of return. We have been talking about and expecting a bond rebound with the prospect of interest rate cuts now seemingly here. From the most recent Fed meeting in August, the future forecast for the Fed Funds rate looks like one percent lower by end of this year and over two percent lower by the end of 2025. That would put the important short-term rate near the Fed’s targeted “neutral rate” of around 3%. To be fair, the Fed’s own forward-looking assumptions have been pretty off over the last several years, so…we shall see.

A Look Ahead

I just saw an interesting survey that I shared with my investment team. A large group of people was shown two sets of stock investment returns: the first with a one-year distribution and the second with a ten-year. The range of returns was much wider in the one-year example and much tighter when looking at ten years. The group was then asked what percentage of their money they would allocate to stocks going forward. The people that saw the one-year distribution could only muster a 40% allocation, while the group that saw the ten year numbers went to 90%. Who says perspective is not important! We all can and should view risk a little differently, and with investment assets, time plays a very critical role. We see it when we look at the longer-term chart of the S&P 500. Various crises that seemed, and indeed were, painful in the moment look like insignificant blips when viewed through a long term lens. We believe we can never re-inforce this enough. In the end, the power of time and compounding investment returns is really what allows investors to build wealth, and impulsive deviations away from that perspective are usually not such a good thing. We remain slightly underweight to stocks and continue to believe that core bonds offer an attractive risk-adjusted return for investors. Historically, September has been the worst performing month in the S&P 500, and it’s started out shaky…it’s likely that volatility will pick up again between now and year-end with elections, rate cuts, etc…and the winding road will continue...and that’s okay.