A Quick Review

Good morning! I hope your last few weeks of summer went well. Summer always seems to pass quickly but now with our kids out of the house its end doesn’t have the same significance. Anyway, my short blog break is over and it’s back to writing these posts.

There are several updates percolating so let’s review…

US and foreign stocks performed well over the summer but have slowed a bit so far in September, which is typical. Bonds were up about 3% in the last three months and this is great for more conservative investors. Part of the reason for the good performance from stocks and bonds is the odd way that markets can sometimes climb a “wall of worry” when investors continue buying as negative information builds. And it has been building, especially in recent weeks.

While the economy continues to grow its growth rate is slowing. That’s not terrible, of course, but it changes the outlook. We’ve seen this play out over the summer in broad measures of economic activity like ISM reports, downward revisions to labor market numbers, and inflation upticks (plus expectations for tariff-related and even immigration-related price pressures).

This puts the Federal Reserve’s rate-setting committee in a difficult spot between its dual mandates to prop up the labor market while keeping inflation in check. Based on the CME Group’s FedWatch tool, investors now see a quarter point interest rate cut by the Fed as a given at its meeting next week. Two more similar cuts are expected later this year and there’s roughly a 40% chance of a fourth cut in January. All would be in response to an economy that’s continuing to slow into year-end. That may not play out exactly as the market expects, but this evolving consensus about the Fed ultimately juicing up the economy helped fuel stock market returns over the summer. It also sent the yield on the 10yr Treasury, a key economic benchmark, down by nearly half a point during this timeframe to a hair over 4% as I type. Bond prices move opposite to bond yields so this mostly explains the good performance coming from bonds.

I don’t think it’s time to worry too much about the economy and markets because it seems like there are positive indicators countering each negative one. Maybe we’re in a slower-growth balance phase for a while, not teetering on the edge of recession, and markets will keep climbing that wall of worry for months. Only time will tell.

Still, it’s wise given market performance to look ahead and think about raising cash for upcoming spending needs. This can be done through rebalancing stocks that have performed well. A broad market US stock fund would be an obvious choice for rebalancing, but sectors like Tech, Communication Services, and Industrials have done the best lately so you can be choosy if you own a variety of funds in your portfolio. Small cap stocks have also had a run this summer and could be good candidates. You can easily rebalance within tax deferred accounts like IRAs and Roth IRAs because the transactions themselves aren’t taxable. But you’ll want to consider your gain/loss options carefully when rebalancing within other account types. You could add sales proceeds to bonds or stick that cash into a money market fund or bank CD if you’ll need to spend it in the next year or so.

Reminder – be wary of mixing near-term spending cash with volatile asset classes. Bitcoin, to pick on something popular, began the summer at around $108,000 per coin, fell to about $99,000, and rose to nearly $123,000 before dropping to $112,000, with all sorts of volatility in between. What if you needed the money along the way – would that have been on a good day? One can make a case for crypto as a long-term speculative asset but it’s no place for short-term cash.

Money market funds from firms like Schwab and Vanguard are still paying a bit over 4% APY, but that’s expected to fall assuming the Fed lowers interest rates as mentioned above. The funds work with a lag of maybe a month or more so the rate decline won’t match Fed policy exactly. You could stick some cash into a short-term CD but those rates, such as out to 12 months, have trended lower over the summer to just below 4% APY in recent weeks. CD rates going out two years and beyond are also below 4%.

All in all, we had a pretty quiet but positive summer in the markets. Volatility typically picks back up heading into the fall and, as usual, there are lots of potential catalysts. However, I still think we have some tailwind in the markets but the sails are starting to buffet a bit. So it’s a good time to review basic portfolio management concepts like rebalancing and setting aside cash as needed. I’m doing this for you if I’m responsible for managing your portfolio. If you’re managing on your own, let me know if you have questions and I’ll be happy to assist.

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