As we enter the second half of the year, it’s important for investors to maintain perspective on major events that have driven the markets. President Biden’s announcement that he will not be seeking re-election, to a rotation out of tech stocks and into small caps, and other recent events have added to market uncertainty. The S&P 500 recently declined 2.9% from its all-time high, while the Nasdaq pulled back nearly 5%.
It’s natural for investors to be concerned about where the market is headed, especially as the presidential election season heats up and the Fed prepares for its first rate cut this cycle. Despite ongoing economic uncertainty, the stock market continues to experience a strong rally.
During the first six months of the year, the S&P 500 gained 15.3% with dividends, the Nasdaq 18.6%, and the Dow Jones Industrial Average 4.8%. The 10-year Treasury yield declined from its April peak of 4.7% to 4.4%, allowing the overall bond market to be roughly flat on the year. International stocks have performed better as well, with developed markets generating 5.7% and emerging markets 7.7%.
With inflation cooling, the Fed is on track to cut rates later this year
Investors have been anticipating the first rate cut of the cycle since the beginning of the year. This has not only driven returns, but is one reason markets have swung so much when new economic data has caused expectations to shift.
The accompanying chart shows the possible path of the federal funds rate based on the Fed’s latest projections. At its last meeting, the Fed cited strong job gains and low unemployment as indicators of solid economic activity but emphasized that “inflation has eased over the past year but remains elevated.” Fortunately, the latest inflation data in May showed a significant deceleration that has preserved the possibility of a rate cut this year.
Steadier rates support the bond market
The path of interest rates has been highly uncertain over the past few years due to inflation, economic growth, and the Fed. Higher rates have defied the expectations of investors and economists, creating a challenging environment for the bond market, since rising rates push down bond prices. Due to the inverse relationship, we see bonds becoming more advantageous with regards to prices as interest rates move down.
Conclusion
We anticipate there is more market volatility on the horizon whether due to politics, the Fed, interest rates, etc. However, we remain cautiously optimistic for the remainder outlook of the year with a potential rate cut on the horizon which could provide a steadier bond market. We believe having a properly allocated portfolio, in addition to making tactical and strategic shifts based on market conditions, will help weather market swings. It’s important to focus on the long run as opposed to the day-to-day market volatility.
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Examples are for illustrative purposes only. All investing involves risk of loss including the possible loss of all amounts invested.
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