The stock market reversed course in the third quarter with declines across all major indices. Large domestic companies, as measured by the Standard & Poor’s 500, dropped 3.6%, while the Nasdaq Composite, heavily weighted in tech stocks, fell 4.1%. The Russell 2000, reflecting smaller US firms, was off 5.5%. Foreign stocks, generally speaking, fell as the Dow Jones World Index (ex US) declined 4.1%.
The quarter began with positive expectations and enthusiastic investor sentiment. The consensus view held that inflation would be tamed while avoiding a nasty recession. Most believed the tightening phase was likely complete and the Fed would end up cutting rates in 2024. But ongoing economic data did not support these notions. The Fed raised rates at the July meeting, and yields on longer-term bonds began to increase. Higher rates had a negative impact on the mega-cap technology firms trading at lofty valuations. While estimates of impressive future earnings of these companies may be justified, calculating the present value of these cash flows in a higher rate environment is just a simple math problem. Higher rates, lower present values. At the same time, investor confidence in these future earnings may have dimmed somewhat as enthusiasm for the prospects of generative artificial intelligence began to wane. While the Fed held steady at the September meeting, Chairman Powell suggested we should expect one more hike this year, and the holding of rates higher for longer throughout 2024. Not surprisingly, negative investor sentiment increased and the market closed out the quarter on a down note.
So, what investment advice do we have at this point? For the short-term investor, that’s easy. You can earn well over 5% in treasury bills or even a money market. And that’s with virtually no principal risk and immediate liquidity. But then, what advice do we have for the long-term investor? The answer here is a bit trickier. Success in achieving your long-term investment goals is dependent on structuring a diversified portfolio allocated between the basic asset classes and the subsets of these classes. In doing so, the astute investor will disregard short-term market noise and look to more reliable historical data. This portfolio should be designed to produce the desired expected return and volatility characteristics of each unique investor. And now the hard part – the investor must maintain the discipline to adhere to this carefully constructed portfolio, even when presented with inevitable painful market conditions. Regular rebalancing of the portfolio, as necessary, is a function of proper portfolio maintenance. However, wholesale changes to one’s long-term portfolio in reaction to frightening shorter-term market gyrations almost always result in significant damage to long-term performance.
In times of stressful market conditions, we recommend staying close to your trusted fiduciary advisor. As such, we welcome your calls, emails, texts, etc. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.