September 23, 2024 •Nathan Willis
Key Events: Rate cuts begin!
The Federal Reserve kicked off its campaign to engineer a soft landing with a larger than expect ½% rate cut on Wednesday. The larger than expected cut indicates the Fed is willing to be more aggressive amidst concerns about a weakening labor market.
Despite US warnings against escalation, Israel conducted targeted strikes against Hezbollah following attacks involving explosive devices hidden in pagers and radios.
Market Review: Stocks and bonds diverge
The bond market “sold the news”, declining slightly this week. Stocks, however, responded positively to the Fed’s aggressive rate cut plans.
Stock returns were broad: international, emerging markets, small to mid-cap stocks, and high yield bonds outperformed the S&P 500 for the week.
Outlook: The stock market, rate cuts and soft landing
The below chart illustrates how rate cuts affect the stock market. The results have varied wildly:
- Normalization: If the Fed can engineer a soft landing, that may suggest strong stock returns.
- Panic: Fed responses often trigger sharp recoveries.
- Recession: If it turns out the Fed cannot avoid recession we should expect significant stock losses.
Soft landings are rare and difficult to achieve. The S&P 500 was up 28% during the 12 months leading up to Wednesday’s rate cut, lowering expectations for future returns. Our advice is to remain invested but maintain some downside portfolio protection.
Rate Cuts: Normalization, Panic, or Recession? [1]
Navigator Outlook: September 2024
This material is intended to be educational in nature,[3] and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. OneAscent can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
[1] Source: Reuters How markets could fare after first US rate cut (reuters.com)
[2] Source: Market Returns reference the following indices: Large Cap – S&P 500, Mid Cap Growth – Russell Midcap growth, Mid Cap Value – Russell Midcap Value, Small Cap – Russell 2000, Developed – MSCI EAFE, Emerging – MSCI Emerging Markets, Aggregate – Bloomberg US Aggregate, High Yield – Bloomberg High Yield
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