Q4 2024 Market Intel Report | Alison Wealth Management

With a strong but volatile push into the fourth quarter of 2024, the stock market has delivered great results to investors who have stayed disciplined. 

In this video, we will discuss the 3 key themes on the minds of investors as we enter into the fourth quarter of 2024. We will discuss:

✅ What could the start of the Fed rate cutting cycle mean for investors? 
The Federal Reserve kicked off its highly anticipated rate cutting cycle with a 50-basis point reduction in September 2024. History shows cash yields decline rapidly following the start of cutting cycles, falling by 2% on average just twelve months later. U.S. stocks have delivered a positive return of 7.2% one year after the initial cut, though depending on whether the economy avoids a recession or not within that year has led to starkly different results (+19.6% vs. –2.7%). 

✅ How have markets performed in the months surrounding presidential elections? 
Based on trends, we shouldn’t be surprised if we see an increase in volatility leading up to the U.S. presidential election. That said, history shows that it may be temporary, as markets tend to calm rather quickly once the results are in. A similar trend can be seen in stock prices, which on average have been choppy beginning in September and lasting into November of election years. However, after Americans go to the polls, investors who stayed the course have historically been rewarded with strong gains, both in the short- and long-term.  

✅ Why should investors think of market volatility as an opportunity? 
Volatility is a feature of investing, not a defect. However, many investors instinctually view it as something to fear and avoid, which can lead to poor behavior and subpar long-term results. Investors could benefit from thinking of the VIX as an “opportunity index.” Because while it’s always a good time to invest, history shows that some of the best opportunities have come during periods associated with elevated volatility. 

🖥 Looking for an advisor who truly understands financial planning, investments, taxes, protection planning, and legacy planning? Visit our website https://alisonwealth.com  

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Transcript

Speaker 0: 0:06

Hey everyone, this is Dave Allison, founder and CEO of Allison Wealth Management, and I want to welcome you to our fourth quarter 2024 market intel report. The third quarter was certainly filled with volatility around the upcoming presidential election, geopolitical events and the Federal Reserve's monetary policy return, the Dow Jones Industrial Average leading the way at over 8% and the tech-heavy NASDAQ index returning almost 3%. Those on top of a hot start to the first part of the year have led to good calendar year returns so far, with both the NASDAQ and the S&P 500 up almost 20% year to date. Of course, all of this in light of uncertainty around the presidential election, of course, as I mentioned earlier, geopolitical risks and the Federal Reserve's rate cutting cycle. That is just beginning, and so, in this video, we're going to talk about the three key themes on the minds of investors today, those being what could the start of this Federal Reserve interest rate cutting cycle mean for investors? How have markets performed in months surrounding a presidential election? And then, last but not least, why should investors think about market volatility as an opportunity? So let's go ahead and dive right in.

Speaker 0: 1:52

The first theme that I want to talk about is what could the start of the Fed rate cutting cycle mean for investors? As we know, in September the Federal Reserve kicked off its highly anticipated rate cutting cycle with a 50 basis point reduction. Now what we typically see is, when the Federal Reserve starts to cut interest rates, cash yields which is the amount of interest that you make on holding cash start to fall quickly. In fact, history shows us that cash yields decline rapidly following the start of a cutting cycle, falling by 2% on average just 12 months later. Now the significance of this is there is a historic amount of cash still sitting on the sidelines. Many of those investors were happy earning their 4% or 5% interest rate on cash. Now, in hindsight, had that money been invested in the market? As I just shared with you earlier, equity markets are up 20% year to date. Of course, more diversified portfolios are up somewhere between probably 5% and 20%, depending on the asset class, and so Cash certainly didn't outperform the markets so far in 2024, but it's been a nice safe haven for liquid money that you don't want at risk, meaningful yield, and that could be a boon to equity markets. If some of that five plus trillion dollars of cash sitting on the sidelines starts getting deployed to things like the stock market. It could accelerate the momentum and price activity of stocks in general. Some of the interesting data points on what the market has done when the Federal Reserve starts cutting interest rates could be a telling sign for what's ahead.

Speaker 0: 4:00

Now, as we all know, history is no guarantee of what will happen into the future. But if we look at the average stock return 12 months after the Federal Reserve has started to cut interest rates, we've seen that going back all the way since 1974, the market has produced an average return of about 7.2% the 12 months after the first interest rate cut. Now, depending on whether the economy avoids a recession or not within the year, has led to starkly different returns. If we look at time periods where the Federal Reserve starts to cut interest rates but we are not in a recession, nor do we go into a recession in the following 12 months, the stock market has produced a 19.6% average return. Well, contrast that to a time period where the Federal Reserve begins to cut interest rates because we're in a recession or we're going into a recession, and 12 months later the stock market produced a return of negative 2.7%. So average return of about 7.2 in times where we're not going into a recession really bullish returns on the stock market. But in times where the Fed is cutting interest rates because we are going into a recession or have a lot of economic uncertainty, negative returns for stocks over the following 12 months. But it's really important as a long-term investor to zoom out because three years or five years later, if you look at that blue line, the average market return three years after the Federal Reserve has started to cut interest rates is 41% and a five year cumulative return of over 77%, even if we are heading into a recession or we're already in a recession. Three years after that first cut positive 18% return. Five years after, we want to make sure we're maintaining a longer-term perspective with our investment strategy. If you have short-term money money that you may need or will need sooner rather than later, money for income in retirement over the next couple years, or your emergency fund cash might be a great asset class to keep that in. But if you want to maximize the growth in the return of your money and you have the right time horizon, now could be a good time to continue to stay the course with your longer term strategic asset allocation plan. And the flip side is, as of today, the economy shows no signs of an imminent recession, but, as we all know, this has the potential to change.

Speaker 0: 6:59

The next thing I want to talk about is the United States presidential elections and historical patterns in market volatility and returns. You see, politics are incredibly important for individuals, as we see why some people get quite passionate over politics, but it's not really for the stock market. The stock market is an incredible information processing machine that is processing all kinds of data points on a company's ability to produce future cash flow and earnings. Politics play into that. Of course they do, but they're just one of many, many factors. One thing that we have seen in historical patterns around election years is that as we lead into the November election date, we see increased volatility in the stock market. If you look at the chart that I'm going to put up in the video, the dark blue line represents the average monthly volatility in an election year, whereas the blue bar represents the average monthly volatility in a non-election year. You can clearly see that as we approach election day September, october, november we see a lot of heightened or increased volatility in the stock market. Once election day comes and goes and the results are in, we start to see that volatility dissipate. Similar trends can be seen in stock prices, which, on average, have been choppy beginning in September and lasting into the November election, but post-election, through the end of the year, we typically see a rise in stock prices. On average, an investment made on November 1st of an election year has rallied over 16% in the preceding eight months after an election, and it went on to gain 11.6% over the next decade on an annualized basis. So if you're asking yourself is now a good time to be in the markets, or maybe you have some cash on the sidelines, as you can see here, based on historical data, we've typically seen an increase in stock prices after election day.

Speaker 0: 9:26

And the last theme I want to talk about is how periods of elevated volatility may in fact represent an opportunity for investors. You see, the VIX, which is the volatility index, often referred to as the fear gauge in the stock market, is a real-time measure of expected near-term volatility. As you can see in some of the historical examples, during the global pandemic, the VIX was over 55. Pandemic the VIX was over 55. When the tech bubble burst in 2002, it was between a range of 45 and 55. When the markets reacted to 9-11 in 2001, it was between 35 and 45. Why this is important is that volatility is a feature of investing, not a defect.

Speaker 0: 10:21

However, many investors instinctively view it as something to fear and avoid. When markets become volatile, people think they should cash out or go to more risk-off assets, and that can actually lead to subpar long performance and results. Using the daily closing price of the VIX, an investment made at any level had a solid average one-year return of 9.7%. However, an investment made on days where the VIX was elevated performed meaningfully better. So the note here is that investors could benefit from thinking of the VIX as an opportunity index, because, while it's always a good time to invest, history actually shows that some of the best opportunities have come during periods associated with elevated volatility.

Speaker 0: 11:20

If you look at time periods where the VIX was 55 or higher, the following one year return was 31.7%. If you look at times when it was 45 to 55, the following one year return of the S&P 500 was almost 33%. So this just goes to show you that behavior is one of the things that can really help ensure that you meet your long-term goals and objectives when it comes to investment performance. It might seem counterintuitive. It might make more sense to cash out when times get volatile, but in fact, the opposite proves true when we look at these historical trends. So if you have any questions at all, please don't hesitate, reach out to your advisor. They're here to help talk about your portfolio construction and ensure that your investments align with your volatility tolerance and put you in the best place to achieve your goals and objectives. Thank you so much and we'll see you next quarter.