Since July 10, we have observed a rotation in market performance. Over the past week this trend accelerated. Major equity markets, most notably Japan, have sold off as a combination of events shifted risk appetite in markets. Despite this trend of volatility our economic outlook remains steady. We feel the market’s recent reactions appear overblown when considering the broader investment context. After absorbing initial pressure, US equity markets ended the month in positive territory. Moreover, the Federal Reserve cut interest rates by half percentage point and is expected to cut rates later this year. This action marks the first easing of monetary policy since 2020 in their efforts to fight inflation.
As mentioned above, despite the volatility, August was a good month for diversified investors as equity and fixed income markets provided positive returns. Because of the yield buffer, fixed income provided protection during the sell-off at the beginning of the month, while equities later recovered on US rate cut expectations. In our opinion, this confirms our Mid-Year Outlook to maintain a long-term approach to investing, prioritize financial planning needs as your primary focus and lastly seize evolving market opportunities as they arise. Though we understand why we are experiencing increased volatility (weak US labor data, unwinding of trading strategies, and geopolitical tensions) we see no evidence of widespread financial imbalances, which are often precursors to recessions. Market declines are a natural part of the investment cycle. For long-term investors, staying invested is crucial.
Finally, we note that navigating the post-pandemic economy is complex, with several factors influencing the US economy’s trajectory over the past several years, including this year’s election. The market likes stability but opportunist love volatility. We feel you will see more volatility no matter the victor. Volatility is here to stay and in our opinion a defensive portfolio with a tilt towards consumer discretionary and technology will most likely be an advantage for the average investor. However, it is imperative that you include financial planning in your goals considering pending legislative sunsets and an increased concern about the role of taxes.
We hope your summer went well and look forward to finishing with a strong 3rd quarter!!
- Bryan Beamer, AMPA, ChFEBC
