The time has come for policy to adjust

Investing Environment Review and Outlook – Volume 84

The economic background, particularly falling inflation, remains one of the biggest positives for U.S. equities with a historical return of 15.5% when CPI was 0-4% and falling. One known short-term offset is the potential for further volatility after the S&P 500 8% round trip from the August 5th low, particularly at this time of the year. Prior cases like August 2011, August 2015 and January 2018 reversed meaningfully lower after the initial rebound. As a result, this month we cut the U.S. equity rating to a still bullish 4. We also raised the commodities rating to a bullish 4, based on the Dollar Index, down 5% from the June peak, historically followed by strong performance of industrial commodities like copper and crude oil. Our economic and inflation outlook indicators remain neutral along with investor positioning.

Fed Chairman Powell Explicit in Jackson Hole: “The time has come for policy to adjust”

In Jackson Hole, WY on 8/23/24, Fed Chairman Powell spoke explicitly saying “the time has come for policy to adjust.” After 2 false starts in the last year when the market prematurely priced in Fed cuts, a September rate cut is now a safe bet. Equities rallied sharply after his comments. It is common knowledge that Fed policy works with a long and variable lag, yet investors still expect an immediate upside response from equities. Our mentor, Marty Zweig, coined the now widely quoted phrase, “Don’t fight the Fed.” What may not be widely understood is that, of the 16 prior initial Fed cuts since 1950, S&P 500 returns were not significant the first 3 months out. One month later, the median return was just 0.7%, below the market norm since then of 0.9%. Even 3 months out the range was -25% (1974) to +17% (1998) and just 56% of cases were higher. Farther out results are a different story, when equity returns are quite positive, up 5%, 10% and 17% 4, 6 and 12 months later.

Bank Lending Standards Easing: Inflection Point for Russell 2000

The July Fed Senior Lending Officer survey showed easier lending standards from banks as the 2020 crash and recession become a more distant memory. Consider a simple fact – the small cap companies in the Russell 2000 rely on bank lending for financing, much more than the big cap names that dominate the S&P 500. With easier financing, these companies will find it easier to expand and invest in their businesses. In prior cases lending standards eased, the Russell 2000 reversed persistent underperformance and outperformed the S&P 500, often for the subsequent 2-3 years. With so much focus and media attention on the big cap technology stocks, most investors are ignoring the upside potential of small cap companies trading at lower multiples. Easier lending standards, combined with the 11.4% July surge we discussed last month, makes it more likely the long-awaited inflection point for small cap stocks has arrived.

Diversification remains the best risk control tool available. Along with traditional stocks and bonds, small cap stocks and commodities are just two examples of uncorrelated assets that can help reduce portfolio volatility. We will continue to monitor conditions on a daily basis and shift exposures as needed. Thank you for your support and please contact us with any questions.

 

IMPORTANT DISCLOSURES

This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
Brenton Point accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this Report, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law.
This Report may provide addresses of, or contain hyperlinks to, Internet websites. Brenton Point has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.
All marks referenced herein are the property of their respective owners. This Report is licensed for non-commercial use only, and may not be reproduced, distributed, forwarded, posted, published, transmitted, uploaded or otherwise made available to others for commercial purposes, including to individuals within an institution, without written authorization from Brenton Point.
Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2024

Sign up!

Sign up for our monthly newsletter and get the lastest news and research from our esteemed advisors here at Brenton point. Right into your inbox!