October Blog Post
October Insights from Crescent Advisory Partners: Your questions answered…
Welcome to the October edition of the Crescent Advisory Partners blog! This month, we’re diving into the financial topics that are top of mind for many of our clients. From the latest on interest rates and inflation to the outlook for the bond and stock markets, and even the potential future of the US dollar, we’ve got you covered. Let’s explore how these developments could impact your financial strategy and what steps you can take to stay ahead.
What will happen with interest rates and how does it affect inflation?
I recently sent my oldest child, Jayce, off for his first semester in college. My youngest child, Jules, became a licensed driver at about the same time. Believe me, I understand a few things about higher costs, especially as it pertains to college tuition and auto insurance. And, while savings rates have certainly been nice in my savings account, that is all beginning to change as inflation starts to ease.
The long-awaited easing cycle has begun. After cutting the Fed Funds rate by 50 basis points at its September meeting, the Fed has more cuts in the tank—at least 50 basis points (bps) more in 2024, and at least 100 bps more in 2025. Fed Chair Powell can answer the question “Are we there yet?” with a resounding “yes!” regarding lower inflation and can now focus on sustaining the health of the economy and employment conditions. Lower interest rates are a significant driver of our hoped-for economic reacceleration in 2025.
With interest rates dropping, what will the bond market bring in the coming year?
Over the past several months, we have been working with many of you to create and/or adjust your bond portfolio. The higher rates and bond yields over the past year or so have been a muchwelcomed addition to the yield received from your portfolio. But now, with rates starting to drop, I have fielded a lot of questions about the future of bonds.
Bonds (particularly high-quality bonds) provide stability and consistent income. And, in times of uncertainty, bonds help dampen volatility. The good news is that the runup in yields from pandemic lows has provided a frugal feast for fixed-income investors starved for higher yields. We forecast bond yields will likely stay relatively stable over the next 12 months, with the 10-year Treasury yield staying in a tight range around 4%. As the Fed continues to cut interest rates, investors should slowly transition their cash holdings to longer-duration bonds. At this moment, our favored parts of the fixed income market are investment-grade bonds, particularly short term, and municipal bonds.
What is the outlook for the stock market?
Have you heard the phrase, “climbing the wall of worry?” It certainly seems as though there are more than enough news headlines to cause the stock market to go down considerably. However, it keeps setting new highs. Many of you have expressed your concern and surprise as we have discussed your returns from your equity market allocation.
If everything goes ‘just right,’ we expect a soft landing, more Fed rate cuts, positive earnings growth, easing inflation, shareholder-friendly activity, and a record amount of cash on the sidelines to support the bull market that we believe has a long road ahead. Our 12-month target for the S&P 500 is 5,850. However, our optimism isn’t on autopilot as election uncertainty and elevated valuations could lead to pullbacks. Our favorite sectors are still Health Care, Industrials, and Technology.
Will the US dollar lose its position in favor of a new reserve currency?
This seems to be a question that is perpetually in the queue when I am talking with many of you. To address this concern, I found and paraphrased below an excerpt from a white paper written by Raymond James Chief Economist, Eugenio Alemán, PhD.
The European Central Bank launched the Euro on January 1, 1999, to promote economic growth and cohesion among the countries of the European Community. However, the Euro has weakened since then due to multiple debt crises, slow economic growth, quantitative easing, political uncertainty, and the lack of fiscal union. This is important because the concept of the European Union and the euro is a much better version of what some are saying China, India, Brazil, South Africa, and Russia are presumably trying to create. China is clearly the leader of these countries, as it has invested heavily over the years. However, China has a non-convertible currency, a Communist regime, very inefficient state-controlled industries, as well as an aging and declining population. Therefore, we do not believe that a manipulated, non-convertible Chinese currency can compete with the US dollar. This is not because the US currency is perfect, but simply because, at least for now, the US dollar is still the top dog in a weak pack.
How will the election affect the markets?
For those of you who have been living under a rock, here’s some breaking news - its an election year! In recent weeks/months, this has certainly been the number one requested topic of conversation with clients.
We expect the race between Vice President Harris and former President Trump will be a nail-biter. In Congress, our base case is that the Senate flips Republican and that the House flips Democratic. Key policy decisions on our radar, regardless of who wins, are tariffs, the national debt, and the expiration of the 2017 Tax Cuts at year-end 2025. While election uncertainty may weigh on the equity market in the near term, remember that other fundamental factors—the economy, Fed policy, earnings growth, and investor sentiment—matter more for investors in the long term.
What should I do next?
Take the long view when it comes to investment decisions; don’t be distracted by the day-to-day headline noise. Reassess the soundness of your financial planning (cash management and budget, investment strategy, insurance and risk mitigation plans, estate planning, and tax strategy, to name a few). This year brought personal tragedy to our family. Having these planning elements in place was crucial in navigating those difficulties. Ensure that your planning is thorough now, as procrastination can lead to undesirable outcomes. Regardless of what lies ahead, we are committed to working for you and are prepared to meet any challenges.
Please call us if you have any questions, or if we can be of any service to you, your family, or friends.
Thank you for your continued trust and confidence!
Sincerely,
Jason D. Newton, CFP®
Financial Advisor
Vice President – Investments
Some of this material was created by Raymond James for use by its advisors. Additional information can be found at:
The information provided is for informational purposes only and has been obtained from sources considered to be reliable, but its accuracy is not guaranteed. Raymond James and its advisors do not offer tax or legal advice. You should discuss these
matters with the appropriate professional. Diversification and asset allocation do not ensure a profit or protect against a loss.
This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor's situation is unique and you should consider your investment goals, risk
tolerance and time horizon before making any investment. Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results.
Economic and market conditions are subject to change.
