The question I am asked more than any other is, "What's going on in the markets or economy?" So, occasionally, I like to share some charts/graphics, along with some brief commentary, to help answer this question.
This week, I have a few great charts on the Fed, how this bull market compares to previous markets, new business starts are strong, and a reminder of why exercising patience is such a historically dependable path to earning positive returns.
I hope you find these notes offer valuable perspective as we work together toward your financial goals.
RATE CUTS AND MARKET PERFORMANCE: The biggest news this month (or this year) was the Fed's decision to cut rates by 0.50%. While the market has mostly gone up since the announcement, you might be curious to know how the market has performed during previous rate-cutting cycles. Since 1929, there have been 14 rate-cutting cycles, and 12 of them resulted in a positive return in the 12 months that followed the first rate cut. The two exceptions, however, were both in this century, with the Tech Crash and the Great Financial Crisis resulting in negative returns. Make of that what you will, but I think it's fair to say that today's market environment is not reflective of either of those two instances. (Source: Charles Schwab)
WHAT'S NEXT FOR THE FED?!: Beyond the market, the next most popular request has been for my opinion on the future of interest rates. While you know that we steer clear of forecasting, I thought I'd share the current consensus forecast. If the Fed Funds Futures are accurate (mind you, that's a big IF), then rates could drop down to about 4% by the end of the year and then to 2.80% by the end of 2025. The latter appears to be where rates may ultimately settle. Again, I stress that these are forecasts which may or may not represent reality, so it will be interesting to see how things play out. (Source: Charlie Bilello)
"NEW BUSINESS STARTS" REMAIN VERY HIGH: Say what you want about how pessimistic people generally are these days, but I think we can all probably agree that it requires significant optimism to start a business. Remarkably, as you can see below, the small business boom continues to be strong—sustainably about 40%-50% higher than pre-pandemic levels, which is incredible! Given this trend, I'm guessing there is much more optimism out there than the media cares to share. (Source: Sherwood)
THIS BULL MARKET IS STILL QUITE YOUNG: For all the pundits who have expressed skepticism toward the market's performance over the last couple of years, it's worth noting that this bull market is still comparatively young and has also been relatively tame thus far. Grant Hawkridge of All Star Charts put together the visual below to compare the current market (in red) to all previous bull markets since 1950 and I think the visual adds incredible perspective as to how this market compares. As far as I'm concerned, so far, so good, and hopefully, we have a long way to go. (Source: All Star Charts via TKer)
THE LOOMING RECESSION: The constant drumbeat of the 2020s has been an expectation that the economy is doomed for a recession. Not to spoil everybody's fun, but this is inevitably true as the great Howard Marks has pointed out, "Whenever we're not in a recession, we're heading toward one." This is simply a fact of life and has been true throughout our investing lives. But when you consider our historical investing experience, it's clear that recessions are not the end of the world for investors who have patience—I have more to say about patience in a moment. In any case, in light of the constant recession rhetoric, it's interesting to see that the data continues to be mostly positive, with none of the six recessionary indicators pointing to a recession as we speak. (Sources: Chart: iCapital, Quote: Oaktree)
HIDING OUT IN CASH COMES WITH A COST: Given interest rates, many investors rushed to "invest" cash in money market funds over the past couple of years. But at what cost? It's not surprising that cash accounts have underperformed equities, though it is striking by how much! But given the paltry performance of bonds, it's noteworthy that they also outperformed money market accounts. With rates now falling, one can only imagine what this chart will look like over the coming few years. (Sources: Chart: Blackrock, Money Market Funds: St. Louis Fed)
THE VALUE OF EXTENDING YOUR TIME HORIZON: While the media spends most of their time discussing "volatility risk," there's a simple antidote available to all of us. That is, to extend your time horizon. Historically speaking, the longer you own your portfolio, the less likely it is that you'll experience a negative return. That might be stating the obvious, but you may be surprised to learn that over periods of just three years or longer, the historical probability of a positive return is 90% or higher. Not too bad! (Source: The Bahnsen Group)
It's an interesting irony that as the market marches higher, many investors grow concerned that the new highs aren't sustainable. As they say, they don't ring a bell at the top, so we believe it's wise to stay prepared for whatever lies ahead.
One could argue that the healthiest mental model for successful investing is to be pessimistic about the short-term but optimistic about the long-term, and then to plan accordingly.
If that seems odd given my perpetual optimism, think about the following quote from George Bernard Shaw through the lens of investing,
"Both optimists and pessimists contribute to society. The optimist invents the aeroplane, the pessimist the parachute."
You could say that the art of financial planning is never letting one emotion overrun the other. That's why I'm here.
If this note raises any questions or concerns, I'm here to talk with you whenever you need me. ~ Adam Jaroch
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate
market value of 500 stocks representing all major industries.