Quarterly Market Commentary, October 2024

We are now three-quarters through 2024, and the U.S. economy continues to grow, albeit at a slower pace market. For example, manufacturing activity has been in contraction territory for months, signaling a slowdown in production and potentially impacting supply chains, and this started ahead of this week’s port strikes. Similarly, retail sales—when adjusted for inflation—have shown a decrease over the last year. This decline indicates that consumers are spending less in real terms, which could be due to increased prices, economic uncertainty, or changes in spending habits. 

Shifts in Consumer Confidence and Labor Market 

Consumer confidence has also declined, reflecting growing uncertainty about the economic outlook. When consumers are less confident, they tend to be more cautious with their spending, which can have ripple effects throughout the economy. Finally, the labor market, perhaps the most important economic indicator, shows signs of cooling as well, with private sector job growth downshifting markedly in recent months. This trend suggests that employers are becoming more cautious about hiring, potentially in response to economic uncertainties or as a result of increased productivity through automation and technology adoption. 

Economic Feedback Loops and the Fed’s Rate Cuts 

All these economic components can work in a positive or negative feedback loop, e.g., consumers feel less confident and therefore cut back on spending, companies respond to weaker sales by laying off workers, which further depresses consumer confidence. In an attempt to curtail this negative feedback loop or even reverse it, the Federal Reserve recently cut interest rates by 50 basis points. Arguably this first cut did not aim to outright stimulate the economy but rather to acknowledge the progress on inflation and move toward a normalized policy stance. Moreover, not cutting now would have meant restraining the economy further via higher real interest rates, which would not be helpful given the weak spots in the economy mentioned earlier. 

Investor Reactions to Rate Cuts 

Some may question the Fed’s decision to cut rates with stocks essentially at record highs, but for investors this may be encouraging because based on history. Indeed, the Fed has cut rates with stocks near (within 2%) all-time highs 20 times, and the S&P 500 was higher a year later 20 times, i.e., 100% of the time (+13.9% average/+9.8% median). History, though, also shows that volatility on average tends to pick up in the near-term after the first Fed cut, and there are reasons to expect that to be the same this time around. For example, in terms of price-to-earnings (P/E) ratios, this will be the most “expensive” stocks have been when the Fed started cutting in over sixty years. 

Natural Volatility Catalysts 

Even if we take monetary policy out of consideration there are already a growing number of natural volatility catalysts, such as economic uncertainty, rising geopolitical tensions, and of course the upcoming election. And again, all these mounting volatility catalysts are showing up right as stocks hover near record highs, so if anything, this could be the set up for a “healthy” correction. Indeed, the S&P 500 since 1980 has experienced an average intra-year decline of 14.2%, but despite this, annual returns have remained positive in 33 of those 44 years. However, even with this clear long-term upward bias for equities, there remains reason to try to mitigate volatility in one’s retirement portfolio. 

Managing the Risk-Return Trade-Off 

Traditional approaches to retirement investing often emphasize a simple shift from growth-oriented assets to more conservative investments as one approaches retirement age. While this strategy has merit, it may not fully address the nuanced challenges faced by modern retirees, including increased longevity, low-interest rate environments, and global economic uncertainties. A more sophisticated approach, focusing on volatility reduction and risk-return optimization, can lead to better outcomes for retirement investors. By carefully managing portfolio volatility and seeking to maximize risk-adjusted returns, investors can potentially achieve more stable growth, reduce the impact of market downturns, and ultimately increase the probability of meeting their retirement goals. 

For retirement investors, understanding and managing the risk-return trade-off is crucial for several reasons: 

• Preservation of Capital: As individuals approach retirement, preserving accumulated wealth becomes increasingly important. High volatility can lead to significant losses at inopportune times, potentially derailing retirement plans. 

• Sequence of Returns Risk: The order in which investment returns occur can significantly impact retirement outcomes. Negative returns early in retirement can deplete a portfolio more quickly, even if long-term average returns are positive. 

• Psychological Factors: High volatility can lead to emotional decision-making, causing investors to buy high and sell low, ultimately harming long-term returns. 

• Income Stability: Many retirees rely on their investment portfolio for regular income. Volatile returns can make it challenging to maintain a stable income stream. 

Our managed portfolios use a sophisticated approach to tackle these, and other issues retirement investors may face. Some individuals may prefer to manage their own investments, but advisors are also available to provide guidance in this situation as well. Regardless, we are here to help in any capacity along the way to achieving your retirement goals. 

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