By: Sheila Morgan
Legendary investor Warren Buffett once stated, “I never know what markets are going to do… they are going to go up and down…but in terms of what’s going to happen in a day or a week or a year even, I never felt that I knew it and I never felt that was important”. While these words may seem simple, most of us as investors find it extremely difficult to not get swayed by the short-term twists and turns of the markets.
Since the onset of the war in Ukraine, geopolitical risks have expanded to the Middle East and beyond with no foreseeable end. Losses continue to rise in the ongoing Israel-Hamas and Russia-Ukraine wars. Debates across NATO and domestically continue about the monetary and political costs associated with supplying Ukraine with military equipment. As part of this backdrop, the U.S. has focused on keeping China from acquiring advanced semiconductor technology that can be applied to its expanding military buildup. After weeks of setbacks and delays, the U.S. Senate gave its final approval to a $95 billion wartime aid package for Ukraine and Israel on February 13th, sending the bill to the Republican-controlled House where its fate is impending. The Russia-Ukraine war is likely to exacerbate and extend global supply chain disruptions. Although the U.S. does little direct trade with Ukraine or Russia, and we do not entirely rely on imports for these products, their prices are determined in global marketplaces.
A divided Congress is the most likely scenario after the elections in 2024. With Republicans presumably taking control of the Senate because they have fewer seats to defend. Conversely, Democrats have a higher chance of retaking control of the House, with some Republicans facing tough reelection campaigns in the aftermath of the ousting of former Speaker Kevin McCarthy.
As widely anticipated, the Federal Open Market Committee (FOMC) maintained the federal-funds rate in a range of 5.25% to 5.50% following its meeting on January 30-31, but cited progress in slowing inflation. In a statement announcing the continuation of the pause in its rate-hiking cycle, the FOMC appeared open to interest-rate cuts later this year, noting that “the risks to achieving [the Fed’s] employment and inflation goals are moving into better balance.” The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.
Stock market volatility remains high. To illustrate, on February 12th the S&P500 Index surged to a new high imparting a sense of triumph and delirium among investors. However, the jubilation was short-lived when on the very next day, this Index rapidly declined -2.54 percent in value. Calm, cool, and collected might describe the fixed-income markets of early 2024. But the specter of higher US inflation broke the calm in mid-February. The US Consumer Price Index (CPI) for January, which was widely expected to drop below 3%, rose 3.1% from a year earlier, with core CPI at 3.9%. In response, the benchmark US 10-year Treasury yield jumped 15 basis points (bps) in a day to 4.32%. It is not uncommon to expect the 10-year yield to be in a range bound between 3.25% – 4.5%. As of February 22nd, the 10-year Treasury yield was 4.32%.
2024 is a presidential election year. Incumbent President Joe Biden and former President Donald Trump currently hold significant leads in their quest for the nomination from their respective political parties. Historically, election years tend to exhibit a consistent pattern of weakness and consolidation early in the year followed by strength in the second half of the year. On average, the stock market bottoms during May of election years, The market usually bottoms and rallies once election uncertainty lifts. Given today’s political climate and the possibility of a very close race, election uncertainty could hang above the market longer than usual. Only time will tell how this election year plays out.
As we navigate through an uncertain environment influenced by earnings trends, inflation, fiscal policies, and the imminent election, we advocate for a balanced approach, prioritizing high-quality stocks and bonds over aggressive speculations, that aligns with our strategy, emphasizing the enduring value of diversification. We must continue to remind ourselves to not get caught up in trying to predict the next move of the index at large, but to continue to research stocks on our radar, charting our course through the twists and turns of the markets with understanding rather than speculation and hedging.
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