Major stock indexes started August on a short-term correction led by Big Tech. The Nasdaq slid over 13% from its July highs before staging a partial retracement. With a late-summer malaise gripping the market’s dominant year-to-date sectors, a renewed appreciation for value stocks (i.e., quality earnings and high dividends) is helping to cushion the sell-off.
A defensive reshuffle should prove that boring is not always bad as investors brave a statistically volatile month ahead. Your FSA investment team is charting these developments closely and adapting our allocation decisions to better fit the environment.
The Time Has Come
Bond prices broke through a significant level this month as Fed Chair Powell announced “the time has come” for the Fed to ease its interest rate policy. A widely expected quarter-point rate cut would reduce the benchmark policy rate to 5.25%.
Powell asserted that the “upside risks to inflation have diminished” while the “downside risks to employment have increased.” My suggestion would be not to dwell on the recession vultures circling above. This is the Goldilocks problem hardwired into the Fed’s dual mandate. Raising rates successfully curbed inflation, yet business growth and the labor market suffered as a result. It’s a never-ending push-pull exercise in search of equilibrium. Our research shows the evidence continues to lean in favor of a soft landing for the economy.
Fight for Jobs
Now that inflation is under control, the Fed will attempt to improve the cooling job market by reducing borrowing costs. Unemployment rates continued to increase in August, clocking in at 4.3%.
The unemployment rate is a full percent higher than the historic lows we cycled through a year ago. With investors already struggling to reckon with tech sector weakness, whispers of a stalling economy are contributing to a stubborn headwind for broader markets.
Election Volatility
We like to spot patterns as part of the philosophy, “you can’t manage what you don’t measure.” If you look at the previous eight presidential elections, you can see the “fear index” tends to spike from September through Election Day. Cooler heads typically prevail once the votes are counted, but the dramatic uncertainty of a White House transition can result in emotionally biased investment decisions that hinder long-term performance.
No matter what size of speed bump we face in this year’s run-up, the FSA Safety Nets® are rooted in investment principles that sidestep rumors and impulsive market moves. Our team’s disciplined approach will continue to uncover the best opportunities available while guarding our active portfolios against sustained downturns.
Please contact your advisor if you are experiencing any changes that affect your investment objectives and how we manage your money. Thank you.
Jordan Daugherty, CFA
Investment Analyst
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