by David Young, President
A Fed Cut and an Election
Last month, the Federal Reserve made a significant move, enacting its first rate cut since early 2020. The central bank slashed the federal funds rate by 50 basis points or one-half of one percent, bringing the benchmark rate down to 4.75% to 5.00%. This cut officially ended the most aggressive rate hike cycle in over four decades, a series of rapid increases implemented to combat soaring inflation. While this rate cut signals a policy shift, it also leaves investors questioning what it means for the economy and how to position their portfolios moving forward.
The larger-than-expected rate cut raised eyebrows, as some market watchers initially took it as a sign that the Fed is worried about the economy’s health. While the unemployment rate has ticked up slightly from its cyclical low and job growth has slowed, most economic indicators suggest that the economy continues to expand at a moderate pace.
This strategy is a calculated gamble. The Fed hopes to extend the current economic expansion by cutting rates without reigniting inflation. It’s a delicate balancing act: move too slowly, and the risk of recession rises. Move too quickly, and the economy could overheat, forcing the Fed back into rate hikes sooner than desired.
Market reaction to the rate cut has been generally positive, with stocks rallying and confidence growing that the Fed has not only tamed inflation but has also charted a path for a so-called “soft landing”—a scenario in which economic growth moderates without a severe downturn.
Despite these uncertainties, 2024 has been a strong year for US equities. The S&P 500 is up 22% year-to-date—more than double its historical annual return of 10.5%—with the technology sector, specifically Artificial Intelligence (AI) leading the charge.
Technology companies now account for 30% of the US stock market’s capitalization and contribute nearly 50% of corporate profits, making them a significant force behind the current bull run.
Recent trends suggest a shift in market dynamics, with previously underperforming sectors such as mid-caps, utilities, and energy starting to show renewed strength. This is reflected in the outperformance of the equal-weighted S&P 500 compared to its market-cap-weighted counterpart, which is heavily influenced by the largest tech stocks. The broadening trend indicates that investors are diversifying their focus beyond a few dominant names and sectors, creating a more balanced and potentially sustainable market rally.
This broadening is welcome news, as it suggests that economic expansion is reaching a wider array of industries and is not solely dependent on technology. It also helps mitigate the risk of a concentrated downturn if tech stocks lose momentum. While technology remains an important driver, a more balanced market creates a healthier investment environment and reduces the risk of sharp corrections driven by narrow sector declines.
The 2024 Election and Market Implications
I decided to pull an article I wrote from my 2020 newsletter right before the last presidential election. Everything I wrote then seems to apply now.
Here it goes:
Everyone asks me, “What about the Election?” That is a great question.
I remember going into the 2016 presidential election. No one thought Donald Trump had a chance. When he won that night, the futures dropped over 1,000 points because of the fear of the unknown. Then they reversed and moved steadily upward for the next several months. The point is that the Dow initially tanked because of the uncertainty of change.
Unfortunately, I don’t know who will win the upcoming election or how it might affect the markets in the short term.
What I do know is that stocks and real estate increase in value much faster over time than cash, bank CDs, annuities, and bonds. That is how asset classes have always worked.
I also know that markets don’t like uncertainty. The only thing for certain is there will always be uncertainty. As such, it never seems like a good time to invest. It is even more difficult because it only becomes obvious in retrospect.
For example, going back in history:
- In the 1930s, the Great Depression, along with 25% unemployment and massive bank failures, devastated the economy.
- In the 1940s, we had a terrible World War with multi-millions of people killed.
- In the 1950s, we had the Korean War.
- In the 1960s, we had the Vietnam War, the Cuban Missile Crisis, Civil Rights Protests, and the assassination of John F. Kennedy and Martin Luther King.
- In the 1970s, we had a global oil crisis, a major bear market, and Richard Nixon’s resignation.
- In the 1980s, we had massive inflation, with interest rates at 18%, along with the historic 1987 stock market crash.
- We had two Gulf Wars in 1990 and early 2000, and Y2K was an uncertainty-creating non-event that dominated our lives before it occurred.
- From 2000 to 2003, there was a terrible bear market, with markets losing 50% of their value. In the middle of that was September 11, 2001 — a horrific act of terror. That was followed by the 2008 housing crash that turned into a financial panic and took the markets down over 50% again.
During each of those downturns, virtually no one wanted to buy, which is why the markets went down so hard. The stock market is an auction, and with no buyers, you have no floor—until people start buying again.
In retrospect, if the goal is to make money, that is exactly when you should buy.
Over “time” (“time” is the key word), stocks and real estate increase in value; when you look at the numbers from 1920 until now (even considering all of the uncertainty previously listed), stocks and real estate have always gone up… if they are given enough “time.” Successful investing is not a short-term endeavor.
It’s interesting to look at the history of Top Flight since its performance is more recent (i.e., the past 26 years). Top Flight gained 1,728% from January 1, 1998 through September 30, 2024. This means $1 million invested in 1998 would be worth $17,280,000 today — an increase of 17 times. To put that in context, Paragon generated those returns during two of our lifetime’s most devastating bear markets. (For compliance, I have to say that past performance does not indicate future results. Please see the disclosures on the last page of this newsletter.)
While the headlines may focus on the immediate impact of the Fed’s rate cut and election dynamics, the bigger picture is what matters most. Trying to time the market based on policy shifts or political events can be risky and counterproductive for long-term investors. Instead, maintaining a diversified portfolio that aligns with long-term goals is a more prudent approach.
Bottom line: I wish I knew how this election would play out. I don’t. There are always reasons not to invest. I also know the best way to build wealth is to invest in stocks and real estate—and give them “time” to work.
Please get in touch with our team if you have any questions or want to discuss how these developments might impact your financial or retirement plan. We’re here to support you and appreciate the trust you place in us as your financial advisors.
Thank you for your continued confidence.