The Bulls and the Bears Square Off: Some Historical Perspective
HWM Market Recap - September 2023
Executive Market Summary
As we study the markets today, one thing becomes more evident – we are watching a clash unfold between bullish and bearish investors. The bullish investors do not believe that we are heading into a recession and are continuing to buy more stocks, while the bearish investors are noticing more value in the bond market and are buying more fixed income.
Simultaneously, we are also seeing a battle between bullish investors and the Federal Reserve. Often, when the Federal Reserve changes its policy – such as changing interest rates as we are seeing now – many economists use the mantra, "Don't fight the Fed." This was coined by a famous investor, Martin Zweig, in 1970 to explain that Federal Reserve policy is often a good predictor in determining the stock market's direction.
Since its establishment over a century ago, the Federal Reserve has undergone 19 tightening cycles (i.e., raising interest rates or selling assets on its balance sheet). Excluding the tightening cycle we see today, 89% of the cycles ended in recession. One way or another, this battle needs to be resolved. Those who follow Zweig's advice have often been on the right side of history; however, the jury is still out as to whether the Fed can achieve a soft landing (last month's newsletter was about hard vs. soft landings. If you missed it, check it out!) With the Federal Reserve raising interest rates as aggressively as they have, we believe it prudent to remain cautious as we believe we have not necessarily felt the full effect of the Federal Reserve's monetary decisions.
Moreover, we continue to see additional opposing signals of a positive and negative outlook. While there is no debate that we have seen a bull market rally since the S&P 500's low in October, there is still tremendous skepticism about the stock market moving higher. We are sensitive to market history and are ambivalent about relying on this one item to drive our investment strategy. Typically, when the market bottoms, investors can purchase stocks at low valuations, which provides a margin of safety. However, if October was the low, valuations were the most expensive on record for a bear market bottom and have not improved since. Therefore, in today's environment, assessing risk is crucial. Our best course of action is to remain patient and defensive.
Ray Dalio, the founder and co-chief investment officer of Bridgewater Associates, the world's largest hedge fund, is famous for saying, "Cash is trash." He began using it in interviews as early as 2019 when interest rates were at rock bottom. In saying this, he signified that while most investors might feel that cash is the safest investment, the risk lies in it struggling to keep up with inflation, thus losing its buying power. After saying the line for years, Dalio finally changed his mind last October, and yields on cash equivalent securities have only gone up since then.
In today's economic climate, we remain defensive and fully utilize our cash allocation. With cash equivalent assets yielding over 5%, patience remains key for our risk-conscious investors. For now, we are keeping the maturities on these assets relatively short at less than one year, and we will continue to weigh the pros and cons of different cash options as the market evolves and our strategy along with it.
Monthly Changes in Indices
Year-to-Date Changes in Indices
Monthly Performance By Sector
Year-to-Date Sector Performance
Political Events Influencing the Economy
The Federal Reserve approved another 0.25% interest rate increase, bringing interest rates to their highest level in 22 years. Speaking at the Jackson Hole Symposium, an annual meeting of global central bankers, the chairman of the Federal Reserve, Jerome Powell, stated that inflation “remains too high” and that the Fed is “prepared to raise rates further if appropriate.”
Consumer prices in July rose 3.2% from a year earlier (0.2% from the month prior). Annual core inflation – excluding volatile food and energy categories – showed an increase of 4.7% from last year, a decrease from June’s 4.8% year-over-year reading.
The average 30-year fixed-rate mortgage in the U.S. reached 7.18% as of the end of August. Per Freddie Mac, the last time mortgage rates for a 30-year fixed were over 7% was in the spring of 2002.
Fitch Ratings, one of the three largest credit rating agencies, downgraded the United States’ credit rating from the highest AAA to AA+. The U.S. last received a credit downgrade in 2011 by a different credit rating agency, Standard & Poor’s.
According to Credit Karma, about 45% of federal student loan borrowers expect to be in delinquency with their student loan payments when the forbearance period ends. In addition, 53% of federal student loan borrowers struggle to meet other expenses even though they may have yet to make repayments in forbearance.
As reported by the New York Federal Reserve, the average minimum annual salary people are willing to accept to switch jobs rose to $78,645, up from $72,873 in July 2022.
A survey from the Federal Reserve shows that 51% of banks said they raised their lending standards for large and medium-sized businesses over the past three months, up from 46% in the first quarter of this year. For small businesses, 50% of banks said they tightened standards since last quarter. For consumer loans, more banks than last quarter said they had upped credit card loan standards, but fewer banks tightened auto loan standards.
If you liked this post, please share it with someone who might benefit from it, and let us know if you have any comments or questions!
About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.