Four Quarters

Fall in New England brings unique foliage colors, cool weather, cider donuts, and beloved fall sports like football. For our readers who are New England Patriots fans, we can remember when our football team used to be able to play four quarters in a row. 

Like some sports, the market and economy are also broken into quarters. Quarterly earnings by public corporations, quarterly GDP numbers, and often, the performance of the stock and bond markets are measured in quarters. 

An amazing thing has happened with the stock market in recent quarters: the S&P 500 (the stock market index tracking the 500 largest companies in the United States) has posted four straight quarters of positive returns. 

Stocks this year have had their best first three quarters of the 21st century, with the S&P 500 up nearly 21%, but it has not been a smooth ride. Starting mid-July through early August, the S&P 500 dropped more than 10% in three short weeks, technically a market correction. (A correction is defined as a market pullback of 10%; a bear market is a pullback of 20% or more.) 

Many market pundits thought the midsummer market correction was the start of a bear market, a time to sell or do something. At Charter Oak, we followed these events closely, rebalanced appropriately, and added to some of our fixed income—but we stayed the course, remaining focused on the long term in support of our clients’ financial goals. 

Quarterly GDP

GDP, or Gross Domestic Product, measures the growth of the U.S. economy. For the quarter ending June 30 (Q2), the economy grew at an annualized rate of 3.0%, up from the 1.6% rate from the first quarter. 

What does this mean? Companies continued hiring and expanding (albeit slower than post-COVID), consumers continued spending (although spending habits are changing), and the economy is growing at a healthy rate. 
 

The Federal Reserve has been trying to slow inflation without putting the economy into recession.

The Federal Reserve

The Federal Reserve has been in the spotlight for the last several years. First, it lowered rates to 0 during the COVID-19 pandemic. Then, starting in 2022, it raised interest rates faster than during any previous rate hike period to tamp down inflation. Now, it is cutting rates to focus on its maximum employment mandate. 

As a quick refresher, the Federal Reserve System has been given a dual mandate—pursuing the economic goals of maximum employment and price stability. It does this by using various policy tools to manage financial conditions that encourage progress toward its dual mandate objectives—in other words, conducting monetary policy.

As the chart below illustrates, the Federal Reserve is now more focused on its mandate of maximum employment. Lower interest rates are good for businesses considering allocating capital to building a new plant or hiring workers. Lower rates are also good for lower interest charges for consumers looking to finance a car purchase or mortgage a home. Lower interest rates, however, lead to lower savings, money market rates, and bond rates.

What about bonds?

So, what does this mean for bonds? Lower rates will reduce our income from bonds and money market accounts, but we are getting higher rates now than we have in over 20 years! It is an excellent time to be a bond investor. Bonds also play an essential role in client portfolios, serving as a ballast for the stock market. When stocks lose value, bonds often add value as investors look for relatively safe investments. Bonds also allow us to be patient, knowing we will have income and stability to help fund important future goals.

What does this mean going forward?

The rest of the year may be more volatile, with an upcoming election and the typically volatile month of October ahead of us. At Charter Oak, we will continue to diligently monitor our clients' investments.

The chart below from Russell Investments is also a great reminder. Wealth is created by staying invested in the market. Missing even just the best ten days of market returns can significantly lower portfolio value. The best days in the market often occur after the worst days. Congratulations to all of you, our clients, who have stayed the course and benefited from the returns the market has delivered.

At Charter Oak, it is a pleasure and privilege to serve our many clients and to provide meaningful advice and guidance through life's transitions. Wishing you all the best as the calendar pages turn toward year-end.

We hope that you have found this review helpful. As always, thank you for the opportunity to serve as your financial advisor.