“Stay humble or the market will do it for you.” – Todd Harrison
August, what we have observed to be a month that can be hard on investment returns, turned out to be a decent month for investors. US large cap stocks did well, with the Dow Industrials and S&P 500 both posting positive gains. International equity indexes also increased in August. Small and Mid-cap didn’t do as well, both posting negative monthly numbers. Away from the stock market, the Aggregate Bond Index was strong on lower bond yields while both the US Dollar Index and Commodity Index were negative for the month.
All data as of 09/03/2024, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Welcome to September, the most interesting time of the year for stock market investors. Keeping in mind how investor-friendly returns have been this year, we must remember that the stock market doesn’t just move higher. It is also important to remember that the stock market is not an index but a group of individual publicly traded companies that make up the index.
Essentially, this month we are following up on what we discussed in our August letter. To briefly reiterate, we took notice of a move away from the higher growth areas of the market like technology to the more value-oriented areas of the market, including the utilities and health care sectors. As the charts below indicate, this trend continued through August.
In our opinion, after many years of dominance from the growth sectors, particularly mega-cap technology, the stock market is in the middle of a change of market leadership. This change could be temporary, but we think there’s a compelling case to be made that a real change is occurring.
Chart #1: www.stockcharts.com Data 01/01/24 – 08/31/24 as of 09/04/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Chart #2: www.stockcharts.com Data 01/01/24 – 08/31/24 as of 09/04/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Chart #3: www.stockcharts.com Data 01/01/24 – 08/31/24 as of 09/04/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Ch-ch-ch-changes
In our experience, there are very few moments in time when real changes happen in the stock market. Most of the time, the market is either trending in one direction or consolidating within a range. These trends are multi-year in duration and do include intermediate counter-trends where the market moves in the opposite direction of the major trend. So, in a primary bull market like the one we have been in since 2013, there will be periods like 2022 where the stock market was down. While these counter-trends are important, at Magellan Financial we are most concerned with the long-term trends as we believe what happens in the short-term is just “noise.”
At the start of September, we believe that the start of a significant change in market leadership is happening. Specifically, we see a move away from almost total dominance of a few mega-cap technology names driving stock market index performance back to a more balanced, broad-based market return profile.
There are two main reasons why we believe this:
Fed Funds Rate Cuts: We have always believed that predicting where interest rates will be in the next year or two is an impossible task. The Federal Reserve Bank (Fed) makes changes to rates based upon real-time data that is unpredictable. Up until a few weeks ago Magellan Financial has correctly been in the no rate cuts camp. What changed our minds? Well, we like to wait for the obvious, which came in August with Chairman Powell announcing the “time has come” for interest rate cuts.¹ The only question now is will the cut be 25bps or 50bps?
Historically, the start of a rate cut cycle has led to a change in market leadership. Sectors such as utilities, real estate, consumer discretionary, financials, and technology are likely to perform well in an interest rate cutting environment. These sectors benefit from lower borrowing costs, increased consumer spending, and enhanced investment attractiveness, making them appealing options for investors looking to capitalize on changing economic conditions. It is notable that we have started to see the performance of these sectors as market expectations for the start of the rate cutting cycle have increased.
Weakening Dollar Index: The value of the US Dollar vs. other currencies is more complex than a simple “if this happens then that happens” statement. There are several important variables that determine the dollar’s strength. Currently, we believe that the expected Fed short-term rate cuts at a time when other central banks are either increasing interest rates or have already done some rate cuts will put downward pressure on the dollar’s relative strength versus foreign currencies.
From an investment standpoint, sectors such as export-oriented companies, commodities and energy, multinational corporations, travel and tourism, and precious metals and mining tend to perform well when the US Dollar Index weakens. These sectors benefit from increased competitiveness abroad, higher commodity prices, and greater foreign investment, making them appealing options for investors during such economic conditions.
Chart #4: www.stockcharts.com Data 01/02/06 – 08/31/24 as of 09/04/24. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results.
Looking Ahead
Bigger, picture, longer-term we remain constructive on the stock market as well as the bond market. We believe that the bull market that has been in place since 2013 will continue to be the major market trend, now with broad-based leadership across many economic sectors. This does not mean we believe that the stock market will not have temporary setbacks.
We are currently short-term cautious on the US stock market at the start of September for several reasons. The most obvious is the US Presidential Election on November 5th. Market history tells us that volatility is likely between now and election day. This isn’t something we see as a negative, or a reason to make changes to investment strategy, just a part of the normal course of how markets operate.
The other reason we are cautious is what appears to be a correction happening amongst the largest technology stocks. This is significant because of the dominance of a few names on the major indexes. With the top ten positions in the S&P 500 representing 32.5% of the index² a correction in some or all of these names would have an outsized effect on the index. To be clear, our research indicates that these dominant companies are fundamentally sound and should continue to be strong over the long-term. In the short to immediate time frame, however, we do not believe a correction in these names is out of the question.
Chart #5: www.stockcharts.com Data 04/01/22 – 08/31/24 as of 09/04/24. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results.
Final Thoughts
Understanding what is happening in the economy as well as the markets is important for investors, but not as important as understanding your personal situation and how your investments are structured for your personal success. Every investor’s situation is different, yet the fundamentals remain the same.
As we enter a typically volatile period for the stock market it is important to remember WHY you are investing. Understanding your why – your financial goals, the personal freedom you have either achieved or are working towards – should remain front of mind. What happens in the next few days or next few weeks to stock prices have nothing to do with your long-term success as an investor. In the words of Utah State strength coach Dan John, the goal is to keep the goal the goal.
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On behalf of Magellan Financial, we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com