The Heat is On…

A few days of extreme heat keeps you inside and gets you thinking. The U.S. economy is continuing to expand. Unemployment remains low so folks are working and spending their earnings. This is good for consumers and ultimately for corporate earnings, which drive the stock market.

The Fed appears to have stopped raising interest rates, but you can still get paid a decent rate on cash today. And if you want to lock in today’s rates for longer, it’s as good a time as we’ve had in the last 20 years to invest in taxable or tax-free municipal bonds.

So things are good. Your grass was green (at least before this week) and either you or somebody you know has either traveled to or is planning on a trip somewhere overseas soon.

What could go wrong?

Anything or nothing, which has always been the case and remains the same today.

Today, it could be China or the Ukraine or Israel/Gaza or a cyber attack or AI or political theater in our country. The bottom line is that there is always risk in the world and investing always involves risk, but these risks and any damage they’ve caused has always come and gone, leading to positive long-term returns that allow most investors to achieve their goals.

Despite the potential for extreme volatility in the short-term, the best course of action hasalways been to simply remain invested through the ups and the downs and let the markets sort themselves out. In the long run, this gets you what you need. In fact, volatility is normal and should be expected rather than feared.

For a portfolio that is 60% stocks and 40% bonds, you’ll still get some down years (like 2022, for example), but you’re looking at positive returns in 82% of years (from 1950 – 2023) with an average return of 9.3%.

Ok, Jeff, so if things are so good, then why don’t you leave us alone and let us enjoy our summer?

Because the current lack of volatility breeds investor complacency and we know that it won’t last forever. It could be a bad inflation number, leading to longer delays in cutting rates by the Federal Reserve or it could be a terrorist attack or it could simply be income tax plans proposed by either candidate in this week’s Presidential debate.

The recent growth of the broader stock indices (S&P 500 & NASDAQ) has been a result of a handful of AI related stocks. In fact, the concentration of these stocks in these indexes and their impact on index performance is at an all time high. Any disruption to the performance of these companies will have an outsized impact on the indexes (like in 2022) and this will end up front and center in your daily news feed.

Do we know what’s coming next? No.

Is a recession coming soon (which tends to have a significant downside impact on the stock market)? No, or at least it does not look like a recession is coming anytime soon.

But at some point, the headlines may have you believing that one is, even where there’s no actual truth in the headline itself. And this may become more difficult to discern as the presidential election cycle rolls into full swing over the next few months.

So what to do? You’ve heard me say over the years, and most typically in the midst of market volatility that we should remain focused on what we can control.

I expect that many of us have other aspects of our financial plans (tax planning, estate planning insurance planning, family planning, etc.) that we can focus on instead of day-to-day or month-end value of our investment accounts. Keep this in mind and consider picking something to accomplish between now and the end of the year because the odds are that this focus will provide a healthy distraction.

Or, at least if you’ve read this, hopefully you’ll keep the same cool head that you have now (with your A/C on indoors) and let whatever happens come and go.

Volatility is normal and something unforeseen is bound to happen at some point. Do we know what it will be? No. Can we control it? Absolutely not. Can we focus on other important financial issues instead and still get some things done? You bet.

Enjoy these longest days of the year and any plans you have with your family and friends. And, as always, reach out to your ACM Wealth Advisor with questions or if you need ideas on which part of your financial plan still needs some work.

1. S&P 500 is represented by the S&P 500 Index, DJIA is represented by the Dow Jones Industrial Average, NASDAQ is represented by the NASDAQ Composite Index, Foreign Stocks are represented by the MSCI EAFE Index and Emerging Markets are represented by the MSCI Emerging Markets Index.

2. Sources: MacroBond Financial AB, Morningstar Inc., Bloomberg LP. 10-Yr Treasury is represented by the MacroBond 10-Year Treasury Bond Index, US Bonds are represented by the Bloomberg Barclays US Aggregate Index, Global Bonds are represented by the Bloomberg Barclays Global Aggregate Index and Munis are represented by Bloomberg Barclays Municipal Bond Index.

3. Federal Reserve Economic Data (FRED); St. Louis Fed; 6.20.24

4. Munis yield is calculated using yield-to-worst.

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