Tanks vs. Fighters in the Battle for Financial Freedom

Five Things You Should Know

1. Equity Markets – moved slightly higher this week with U.S. stocks (S&P 500) up 0.25% while international stocks (EAFE) rose 0.22% 
2. Fixed Income Markets – finished lower with investment-grade bonds (AGG) down -0.51% and high yield bonds (JNK) down –0.03% 
3. Macro Back in Focus – With earnings season officially over the focus has now shifted back to Fed policy. Current money markets are pricing in 100 basis points of cuts between now and year-end, but uncertainty remains on the severity of the first expected cut next month. Atlanta Fed President Raphael Bostic admitted that “it may be time to cut” but also countered growing sentiment that a 50 basis point cut may occur in September.
4. August Recovery – Despite a rocky start to the month, global markets rallied to mark four consecutive months of gains for both global stocks and bonds. U.S. Treasuries are in the middle of their longest monthly winning streak since July of 2021. Meanwhile, the S&P 500 has only seen one month of negative returns since late 2023.
5. Key Insight – [VIDEO] In light of the current tug-of-war between slowing economic data in some key areas vs. a Fed that is now committed to cutting rates, we discuss what makes a good investment – and more particularly the key consideration of “role” when answering that question. [ARTICLE] Slowing economic data continues to appear across the landscape, coupled with less than stellar earnings which has markets rangebound after their rebound from early August correction. We share of the most recent data of note, along with some good historical reminders on the oddities of the market and wrap things up with a great piece from Stephanie Link after the recent correction.

Insights for Investors

As we discuss in the video above, after rebounding in large part from the lows of early August the equity markets are now struggling once again for direction. On the positive front, you have some GDP numbers are still resilient, inflation numbers have been improving and the Fed has now officially stated that rate cuts our on the way.

So why are markets fluttering within a range despite that news? For one, earnings expectations and valuations are still very high for tech names (e.g. see this week’s earnings report and sell-off from the market’s AI darling) but there are also a number of macro data points that continue to point to a slowdown. This week brought a number of reports from the various regional Fed surveys, and they showed that manufacturing continues to slow, and ALL five regional reports reported negative employment growth in August and shrinking capital expenditures – both classic leading indicators and both negative.

We highlight this building struggle as we hear many signaling the all-clear for markets, as well as many pointing to recent market strength as some kind of new norm. To borrow the phraseology from AMG (author of the chart below) investors should be very wary of using recent averages during what has been since the GFC a largely “feast season” as some kind of guidance for building out their financial plans.

There are two key call-outs from their chart:

1. you almost never get average (e.g. from 1926 through 2023 you’ve only had 6 years close to the markets long-term average of 10%), and
2. markets are often, in extreme “feast” or “famine” scenarios (let alone a season like 2000-2010 which saw the S&P 500 essentially flat point to point for a decade)

Source: AMG, Data as of 12-31-2023

As we discuss in the video above, in the incessant market “battles” on the way to financial freedom most investors will have to make sure they have plenty of “tank-like” assets such as bonds and real estate, alongside their “fighter plan-like” assets to help buffer volatility and provide sufficient cash to keep them in the “fight.” While equities have a historical annual drawdown of over 14%, fixed income as reflected by the Barclay’s Aggregate Bond Index (see chart below) has been positive right around 90% of calendar years over the last 48 years, with an average drawdown of just 3.5%

Source: JPMorgan, Date: 6/30/24

Below is a great piece that Stephanie Link put out a couple weeks ago after the correction with some more great historical facts and perspectives to keep in mind, I hope you enjoy.

Have a wonderful holiday weekend,

Tim and the team at TEN Capital

Data, Just the Data

U.S. Initial Jobless Claims – fell by 2,000 from the previous week to 231,000 on the period ending August 24th. This was in line with market expectations of 232,000. 

U.S. MBA Mortgage Applications – edged 0.5% higher from the previous week in the period ending August 23rd. This contrasted sharply with the 10.1% plunge in the prior week. 

U.S. Chicago PMI – rose to 46.1 in August of 2024. This was up from 45.3 in the prior month and surpassed market estimates of 45.5. 

Eurozone Inflation Rate – fell to 2.2% in August of 2024 from 2.6% in the earlier month. This was consistent with market expectations and marked the softest increase in consumer prices since July of 2021. 

Eurozone Economic Sentiment – rose to 96.6 in August of 2024 from the upwardly revised 96 in the previous month. This was the highest level of sentiment in over one year and landed firmly above market expectations of 95.8.