As we enter the last quarter of the year, the financial world has taken some unexpected turns.
Despite fears of a recession, our economy has continued to grow, albeit at a slower pace. Inflation is coming down, moving closer to the Federal Reserve's target. This shift has led the Fed to start lowering interest rates, which has pushed the S&P 500 and Dow Jones to new record highs and improved bond returns. These events remind us that it's often better to focus on long-term trends rather than short-term happenings.
Of course, we still face challenges in the months ahead:
We're not sure exactly what the Fed will do next with interest rates.
The upcoming presidential election could affect taxes, regulations, and trade policies.
Global conflicts are getting worse, which could impact world stability, supply chains, and oil prices.
The stock market might swing up and down, especially since stock prices and expected earnings are quite high right now.
However, facing risks is part of investing. What matters most is how we respond to these risks. Instead of trying to time the market perfectly, it's usually better to have a well-balanced investment portfolio that can handle different market conditions.
Let's look at five key factors influencing the market and what they might mean for experienced investors like you.
1. New Market Highs Are Normal in Bull Markets
The stock market has hit many new all-time highs this year.
While this is good news, it might make some investors nervous, wondering if we're due for a downturn.
It's important to remember that during bull markets (periods when stock prices are rising), it's normal to see many new record highs. This happens because companies are earning more, the economy is growing, and investors are feeling optimistic.
Just because we've hit new highs doesn't mean a downturn is coming soon.
Of course, the market will eventually have some down days - that's just part of investing.
But trying to predict exactly when those will happen is very difficult. For example, this year we saw small dips in April and August, but the market bounced back faster than many expected. History shows us that it's often better to stay invested rather than trying to jump in and out of the market.
2. The Market Has Performed Well Under Both Political Parties
With the presidential election coming up, many investors are worried about how it might affect the economy. While elections are important for our country, it's crucial not to let them dictate our investment decisions.
Looking back, we can see that the stock market has grown over the long term regardless of which political party is in power. This is because things like economic cycles, company earnings, and overall market conditions have a much bigger impact on stocks than who's in the White House.
That said, government policies can affect taxes, trade, and regulations. But these changes often happen slowly, and their impact is usually less dramatic than people expect.
What politicians promise during campaigns is often different from what actually happens once they're in office. As an experienced investor, it's better to focus on long-term economic trends rather than day-to-day political news.
3. The Fed is Likely to Keep Cutting Interest Rates
Inflation is continuing to slow down.
The latest data shows that the PCE price index (the Fed's preferred way to measure inflation) is up just 2.2% from last year, getting close to the Fed's 2% target.
The job market is also cooling off a bit, with unemployment at 4.2%, though this is still low compared to historical averages.
These conditions led the Fed to cut interest rates by 0.5% in September, and more cuts are expected through the rest of this year and into 2025. The stock market has been anticipating these cuts all year, which helps explain why it's been doing well.
It's worth noting that the current situation is different from past rate cuts. Often, the Fed cuts rates during economic crises, like in 2008 or 2020. But now, they're trying to achieve a "soft landing" - slowing the economy just enough to control inflation without causing a recession.
This is similar to what happened in the mid-1990s, which led to a long period of economic growth and rising stock prices.
4. The Bond Market is Changing
As the Fed cuts interest rates, we're seeing lower rates across all types of bonds. This is reversing the tough times bonds had in 2022 when interest rates were going up.
Remember, bond prices move in the opposite direction of interest rates. So, as rates fall, existing bonds with higher rates become more valuable. This means that right now, bond investors can benefit from both higher-than-average yields and potential price increases if rates continue to fall.
For the broader economy, lower interest rates make it cheaper for companies and individuals to borrow money. This can boost economic growth, which is good for company earnings and stock prices.
That's why it's important to keep a balanced mix of stocks and bonds in your portfolio, even though bonds have faced challenges in recent years.
5. Geopolitical Conflicts Are Concerning, But Their Market Impact is Often Limited
Tensions are rising in the Middle East, adding to ongoing global conflicts like the war between Russia and Ukraine. While these events have major real-world impacts, their effects on the stock market are often less direct and usually short-lived.
Looking back, we can see that long-lasting market downturns typically coincide with major economic events, like the dot-com crash or the recent interest rate hikes, rather than geopolitical conflicts.
One way these conflicts can affect the economy is through oil prices. The situation in the Middle East has caused oil prices to rise slightly, but the increase has been modest compared to past crises. The fact that the U.S. is now the world's largest oil and gas producer helps protect us somewhat from global events.
Despite all the geopolitical uncertainty, the stock market has only had two pullbacks of 5% or more this year. This underscores the importance of staying invested and focusing on broader market trends rather than reacting to headlines.
Conclusion
With interest rates coming down, the election approaching, and markets near all-time highs, it's more important than ever to stay focused on your long-term financial goals.
As an experienced investor, you've likely weathered market ups and downs before. Remember, a well-balanced portfolio tailored to your specific needs and risk tolerance is often the best way to navigate changing market conditions.
If you have any questions about how these market trends might affect your specific financial situation, don't hesitate to reach out. We're here to help you make informed decisions and stay on track toward your financial goals.
You can also request a free retirement assessment here. This is valuable if you want an objective party to review your investment portfolio to ensure that you are doing everything possible to manage risk regardless of what the future holds.
Author: Mark Fonville, CFP®
Mark is a fiduciary and fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money.
Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.