The stock and bond markets had a great third quarter. The results in the graphic above speak for themselves, but it’s important to note the exceptional performance of large US stocks (as measured by Vanguard’s S&P 500 ETF), which are up over 36% over the past year. This brings the trailing 10 year return to 13% per year! For every $1 you invested in the S&P 500 10 years ago, you would have about $3.50 (assuming reinvestment of all dividends). Needless to say that 3.5Xing your money over 10 years is phenomenal growth!
And while these results are certainly exciting for any investor to see, I think it’s important to manage expectations. I hate to say it (and I know I could be wrong), but I would be VERY surprised to see 10%+ returns in large US stocks over the next 10 years.
As an example of what we might expect for future returns, let’s take a look at Vanguard’s Market perspectives report (link). Vanguard is estimating the 10 year return for US stocks between 3.2% – 5.2%… if we take the mid-point, that’s 4.2%! Crazy low, right? I’m not so sure. There are a variety of factors (e.g. demographics, high valuations, high profit margins, etc.) that augur lower future equity returns.
Many folks reading this may think, “Geez, why’s this guy being such a downer!” But I think it’s important to both bring down expectations during good times, and bring up expectations during bad times. At all times, long-term investors should strive to avoid both despair AND exuberance. Maintaining equanimity is the name of the game when it comes to investing, and those investors who can master their emotions have a tremendous advantage.
What to do about the election
Unless you’ve been living under a rock, you’re likely aware that there is a big election coming up in less than a month. For obvious reasons, this election season has many folks on edge and concerned about the economic and financial consequences of various outcomes.
So what should we do? First off, go vote. If you want some agency in the process, either voting or volunteering can offer that. After that, the short answer is “when in doubt, do nothing”. The reality of investing is that many of the factors that drive investment outcomes are out of our control. We can’t control recessions, interest rates, wars, economic shocks, or even the outcome of presidential elections. Many times all we can do is manage our own emotions and behavior and try to tune out the “noise”.
You might take comfort in the fact that the stock market has historically performed well regardless of which political party occupies the Oval Office. And even if your preferred candidate loses, remember that wagering against the United States has often been a bad bet.
However, what if you can’t sleep at 2 AM and the stress is killing you? Well, maybe then it’s ok to “sin a little” and take some modest actions to help reduce emotional stress. For example, instead of selling your entire stock position and going to 100% cash, why not start with selling 5-10% of your stock position and see how that feels? You might be surprised at the power of small changes.
Economic update
I looked at the bullet points that I posted in last quarter’s update, and they all still apply, so here they are again:
Real GDP growth remains within the normal range
Inflation remains under wraps, but still slightly elevated
Commodity and energy prices remain stable
Unemployment has ticked up slightly so far this year
Global geopolitical developments and the US presidential election season could could introduce additional volatility to markets
However, the big recent economic news was the Fed’s rate cut, so I’ll talk about it a little here.
The Fed rate cut
In an effort to achieve an economic “soft landing”, the Fed finally cut interest rates by 0.50% in September. The market widely expected this action, so there wasn’t much of a reaction other than a small rally in stocks. Bond prices have actually come down since the Fed cut and are now back to the levels seen in August, which just illustrates that the Fed’s sphere of control mainly only covers short-term interest rates.
This was a bit of an unusual time to cut rates, as the Fed typically only cuts rates during times of economic turmoil. The thinking goes that, during a recession, lowering rates can help reduce borrowing costs for businesses, which will enable them to avoid or reduce job cuts. Lower rates can also provide relief for everyday consumers in the form of lower mortgage, auto, and credit card rates. However, if the economy is doing well, then there is generally no need to provide this sort of stimulus.
And while many folks encouraged the Fed to cut rates, the decision was not without it’s detractors. Some market observers were concerned that the Fed’s move could signal to the American public that the economy was struggling behind-the-scenes or even that the Biden administration had influenced the Fed to cut rates in an effort to supercharge the stock market and broader economy. I’m skeptical that either of these are valid.
Other market observers believe that the economy is doing fine and the Fed made a mistake by cutting rates now. For example, the September jobs report, which came out shortly after the rate cut, was much better than expected (245k jobs added, unemployment rate dropped to 4.1%). While only a single data point (and subject to large revisions in the coming months), those numbers don’t seem to indicate an economy that is struggling.
Needless to say, I don’t envy the position of the Fed Board members. It’s a tough job that will always anger someone. Overall, I think the Fed Board made the best choice they could with the information they had available.
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Market Commentary 3Q 2024
Market update
The stock and bond markets had a great third quarter. The results in the graphic above speak for themselves, but it’s important to note the exceptional performance of large US stocks (as measured by Vanguard’s S&P 500 ETF), which are up over 36% over the past year. This brings the trailing 10 year return to 13% per year! For every $1 you invested in the S&P 500 10 years ago, you would have about $3.50 (assuming reinvestment of all dividends). Needless to say that 3.5Xing your money over 10 years is phenomenal growth!
And while these results are certainly exciting for any investor to see, I think it’s important to manage expectations. I hate to say it (and I know I could be wrong), but I would be VERY surprised to see 10%+ returns in large US stocks over the next 10 years.
As an example of what we might expect for future returns, let’s take a look at Vanguard’s Market perspectives report (link). Vanguard is estimating the 10 year return for US stocks between 3.2% – 5.2%… if we take the mid-point, that’s 4.2%! Crazy low, right? I’m not so sure. There are a variety of factors (e.g. demographics, high valuations, high profit margins, etc.) that augur lower future equity returns.
Many folks reading this may think, “Geez, why’s this guy being such a downer!” But I think it’s important to both bring down expectations during good times, and bring up expectations during bad times. At all times, long-term investors should strive to avoid both despair AND exuberance. Maintaining equanimity is the name of the game when it comes to investing, and those investors who can master their emotions have a tremendous advantage.
What to do about the election
Unless you’ve been living under a rock, you’re likely aware that there is a big election coming up in less than a month. For obvious reasons, this election season has many folks on edge and concerned about the economic and financial consequences of various outcomes.
So what should we do? First off, go vote. If you want some agency in the process, either voting or volunteering can offer that. After that, the short answer is “when in doubt, do nothing”. The reality of investing is that many of the factors that drive investment outcomes are out of our control. We can’t control recessions, interest rates, wars, economic shocks, or even the outcome of presidential elections. Many times all we can do is manage our own emotions and behavior and try to tune out the “noise”.
You might take comfort in the fact that the stock market has historically performed well regardless of which political party occupies the Oval Office. And even if your preferred candidate loses, remember that wagering against the United States has often been a bad bet.
However, what if you can’t sleep at 2 AM and the stress is killing you? Well, maybe then it’s ok to “sin a little” and take some modest actions to help reduce emotional stress. For example, instead of selling your entire stock position and going to 100% cash, why not start with selling 5-10% of your stock position and see how that feels? You might be surprised at the power of small changes.
Economic update
I looked at the bullet points that I posted in last quarter’s update, and they all still apply, so here they are again:
However, the big recent economic news was the Fed’s rate cut, so I’ll talk about it a little here.
The Fed rate cut
In an effort to achieve an economic “soft landing”, the Fed finally cut interest rates by 0.50% in September. The market widely expected this action, so there wasn’t much of a reaction other than a small rally in stocks. Bond prices have actually come down since the Fed cut and are now back to the levels seen in August, which just illustrates that the Fed’s sphere of control mainly only covers short-term interest rates.
This was a bit of an unusual time to cut rates, as the Fed typically only cuts rates during times of economic turmoil. The thinking goes that, during a recession, lowering rates can help reduce borrowing costs for businesses, which will enable them to avoid or reduce job cuts. Lower rates can also provide relief for everyday consumers in the form of lower mortgage, auto, and credit card rates. However, if the economy is doing well, then there is generally no need to provide this sort of stimulus.
And while many folks encouraged the Fed to cut rates, the decision was not without it’s detractors. Some market observers were concerned that the Fed’s move could signal to the American public that the economy was struggling behind-the-scenes or even that the Biden administration had influenced the Fed to cut rates in an effort to supercharge the stock market and broader economy. I’m skeptical that either of these are valid.
Other market observers believe that the economy is doing fine and the Fed made a mistake by cutting rates now. For example, the September jobs report, which came out shortly after the rate cut, was much better than expected (245k jobs added, unemployment rate dropped to 4.1%). While only a single data point (and subject to large revisions in the coming months), those numbers don’t seem to indicate an economy that is struggling.
Needless to say, I don’t envy the position of the Fed Board members. It’s a tough job that will always anger someone. Overall, I think the Fed Board made the best choice they could with the information they had available.
Matthew P. Jenkins, CFA, CFP®
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Matthew is a CFA® Charterholder and CERTIFIED FINANCIAL PLANNER™ Professional. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and the Fee Only Network.