May You Live in Interesting Times

While hurricane season hasn’t hit us with a storm yet in South Florida (knock on wood), the markets are buffeting us against the rocks this past month. As interest rates continue to rise, the dearest 7 tech stocks holding up the indices showed vulnerability. The only place to hide has been cash and short-term treasury bills. Not only is the S&P down over 10% from its recent highs, but volatility, as measured by the VIX, has spiked from a September low around 13 to 21. No matter how the VIX works, its measurement is up over 50% in a month and a half.

The indices are divergent which is something we have not seen since around 2015. What does this mean? The S&P, for example, is up around 7% for the year while the Dow is down 2% and the Russell 2000 (small/mid cap index) is down 7%. As mentioned, technology related companies are driving the S&P’s positive returns. The Nasdaq is up 20% this year after having been down over 30% last year. Still, not even close to it’s all-time highs.

We use these examples to help us keep perspective. The Dow and Russell are probably indications of what we all already know. The economy is slowing, and the real effects of higher interest rates are hurting both the consumer and business margins. Interest rates are probably closer to their 50-year average than above or below it, but we have been operating in a low-rate environment for so long, we got used to it.

For some good news, the Fed is likely close to the end of their rate hiking cycle as evidenced by another pause with no rate hike on November 1st. Another silver lining is the US GDP, which came in at +4.9%.

A slowly expanding war in the middle east adds anxiety and daily reminders that the terrorism mindset persists. The slow progression of military activity suggests reluctance to bring this conflict to all out, multinational war for now. Add the Ukraine/Russian war trudging on and the potential for a future China/Taiwan conflict and we have “geopolitical risk” bingo.

Though we finally have a speaker of the house, he has a lot on his agenda – let’s see how effective this new leader can be in staving off a government shutdown in precious few weeks. Government dysfunction and the approach of an election year add to the list of sources for recent volatility.

The bottom line

October is typically a month when slumping late summer markets perk up, but this year, those markets reflected significant global headwinds. It is easy to read these challenges through a gloomy lens, but also worth noting that the U.S. economy has remained a bastion of strength in the world through this time: inflation continues to trend downward, and evidence suggests that if there is a recession in 2024, it will be a mild one.

This new environment is one for guarded risk, reexamining asset allocations and even taking on increased duration in fixed income considering rates are finally what we would call compelling.

No matter what comes, we will help you navigate it, keeping eyes forward and your goals in sight. Thank you for your continuing trust in our guidance.

In the end, we’d prefer less interesting times.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Any opinions are those of Peter Bermont, Michael Gold & Bill Bermont, not necessarily those of Raymond James.