26/08/2024 | News release | Distributed by Public on 27/08/2024 02:15
"The time has come to adjust policy." That was what Federal Reserve Chair Jerome Powell said to an audience of his peers and colleagues in his speech at Jackson Hole, Wyoming, on Friday, and as expected, it was music to investors' ears. Rate cuts are finally coming.
Over the last few weeks, asset prices, including both stocks and bonds, have largely priced in the expectation that the Fed will begin cutting its policy rate starting in September and from a twenty-three-year high. Major U.S. stock averages closed the week higher and added to their gains from the previous week. Notably, after a very rocky start to August for the major U.S. stock averages, all but the Russell 2000 Index is higher month-to-date and heading into the final week of the month.
Last Week in Review:
"The direction of travel is clear." Is it, though?
While that statement is how Fed Chair Powell described forward monetary policy in his speech at Jackson Hole last week, that's likely not the best way to describe how markets may trade over the coming weeks and months. However, it is unlikely investors will see the magnitude of volatility experienced at the beginning of the month through the rest of the year, barring an unforeseen event shock.
As Bespoke Investment Group recently noted, the type of spike in volatility seen at the start of the month has only occurred a handful of times since the early 1990s. Historically, these sudden spikes are not persistent, do not lead to additional outsized spikes, and volatility tends to trend back to where it was before the spike. While this describes the historical trend of volatility shocks, it also explains how the latest volatility spike came and went, as the VIX Index is now back near levels prior to the spike at the start of August.
With major U.S. stock averages, like the S&P 500 and Dow, back near their high-water marks, investors should be a little more cautious of the near-term "direction of travel" from here. For stocks to grind higher through year-end, profit expectations need to be met, outlooks need to remain largely positive, consumer/business trends need to stay on track, and the Fed still needs to land the plane into a soft-landing. Simply, a lot has to go right for stocks to continue to elevate from here. And let's not forget we have an election this year, which historically can lead to some increased volatility as the November contest draws near. Did we mention historically weak stock performance in September? Over the last four years, the S&P 500 has dropped 4.9%, 9.3%, 4.8%, and 3.9% during September.
It's important to remember that volatility cuts both ways. Over recent weeks, we've had a quick drawdown and a reassertion of buying momentum. As a result, major averages are flirting with July highs, with the fundamental backdrop largely unchanged across this period of volatility - other than investors now having high confidence that the Fed is going to cut rates next month and keep cutting into next year. In our view, that's the real rub to consider. If the Fed has to keep cutting, it's likely because unemployment is rising, which could cause consumers to more aggressively pull back on spending, which likely feeds into lower-than-expected profit growth into next year.
Bottom line: Long-term investors should discount where the S&P 500 ultimately ends the year, though our base case year-end target of 5,750 does imply a little more upside. Stick with a high-quality, well-diversified portfolio, have a plan to buy potential stock drawdowns over the next 3, 6, and 12 months, and lock in higher interest rates now with longer-dated fixed-income bonds/funds. In our opinion, it's a plan of action that can help investors stay proactive in a changing market environment and which may not always provide such a clear view of how to travel.
The Week Ahead:
Move over, Powell. It's Jensen Huang's turn to move markets. In our view, NVIDIA's earnings report this week may actually have more impact on the overall market than Powell's Jackson Hole speech last week.
Important Disclosures
Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.
The S&P 500 Equal Weight Index is the equal-weight version of the widely used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight, or 0.2%, of the index total at each quarterly rebalance.
The S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) information technology sector.
The NASDAQ Composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
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The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.
The US Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. This is computed by using rates supplied by approximately 500 banks.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
The Chicago Board of Options Exchange (CBOE) Volatility Index® (VIX®) Index is based on real-time prices of options on the S&P 500® Index (SPX) and is designed to reflect investors' consensus view of future (30-day) expected stock market volatility.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Jensen Haung, NVIDIA and third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
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