Trust Investment Management
July started out with a bang as family and friends gathered to celebrate the Fourth of July. Fireworks lit up the skylines across our country while markets rocketed higher. With the job market and inflation moderating during the month, U.S. small caps and fixed income rallied. Small cap stocks are typically more sensitive to interest rates since they rely more on borrowing than large cap. The S&P 500 retreated later in the month, as excitement in artificial intelligence waned. Even so, U.S. large caps provided potent returns over the last year.
The CME Group’s FedWatch tool shows a 100% probability that the Fed will cut rates in September by at least 25 basis points (with a 73.5% probability of a 50-basis point cut). This is due to a moderation in job gains and a move up in the unemployment rate. The unemployment rate increased to 4.3% in July, according to the latest release from the U.S. Bureau of Labor Statistics. This was the fourth month in a row it increased.
Inflation has eased over the past year but remains somewhat elevated. The personal consumption expenditures (PCE), which is the Fed’s preferred inflation gauge, remained unchanged at 2.6%. At the end of the month, the Fed held rates steady and commented that recent indicators suggest that economic activity has continued to expand at a solid pace. Investors are concerned that the Fed may have taken too long to lower rates and are hopeful that the first-rate cut will be a larger one to help engineer a soft landing.
With the outperformance of U.S. large cap equities the last 10 years, some investors may be considering investing all of their funds into the S&P 500. Many investors did back in the late 1990’s as the Dot-Com bubble experienced “irrational exuberance”. The Wall Street Journal even published an article questioning if diversification makes sense anymore. In hindsight, we know that diversification is an integral and prudent part of investing. Our belief is that all asset classes are cyclical in nature and that diversification works in the long run. We should patiently remember that long-term goals require long-term strategies. For investors that may need a refresher on how this strategy could have served them well during the “lost decade”, 2000-2010, there is a dated but relative article that can be accessed at:
https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/
