Category: CIO Insights

April 2, 2025

March 10, 2025

After notching all-time highs intra-month, equity markets fell off considerably to close lower in February, with the S&P500 declining -1.3% for its second negative month in the last three. Weakness was seen especially in technology and other economically sensitive small-cap areas, while defensive sectors like energy and utilities held up well. Continuing the emerging 2025 trends, International stocks (both developed and emerging) outpaced US markets, and the equally weighted S&P index exceeded its market-cap weighted counterpart. Treasury yields fell and safe-haven assets such as gold posted strong gains in the flight to safety. Volatility spiked with the VIX index rising above 20 and holding, a clear signal of market anxiety.

This plunge in sentiment was a result of several bearish themes. Inflation angst intensified, as February’s CPI report showed rising prices which spooked investors and underscored the need for more Fed work to combat sticky inflation. Uncertainty around trade policy also came to the fore, as President Trump expanded his previously announced tariffs to include an additional 25% on vehicle imports, with potential further duties targeting the semiconductor and pharmaceutical industries. Investors are understandably weighing the potential impacts of these aggressive policies, with many economists expecting lower growth and/or higher future inflation. To add insult to injury, economic growth concerns emerged as the both the Conference Board Index and Purchasing Manufacturers Index for services contracted steeply. Risk off, risk off.

Despite the challenging month, there were glimmers of hopes for bulls to hold onto. Corporate earnings growth has shown remarkable resilience, with 75% of reporting S&P500 companies posting positive earnings surprises and 63% exceeding revenue expectations. The blended Q4 earnings growth rate sits at 18.2%, far exceeding market expectations of 11.9% and marking the strongest quarterly performance in over three years. Expectations for 2025 remain high, and if they are met – or exceeded – we could see strong earnings provide some much-needed fundamental support for the post-election rally to continue.

An additional pillar of support could take the form of a lower interest rate environment. During February, Fed Chair Powell testified before Congress and despite comments on holding short-term rates steady, longer-term bond yields fell steadily during the month. Although short-term rates continue to grapple with mixed inflation and labor-market data, the 10-year treasury yield has quietly declined from a peak of 4.79% in January to 4.2% by the end of February. These declining yields supported fixed income returns during the month, which were broadly positive. More importantly, they served as a counterweight to the broad sentiment decline seen in the equity markets and provided ballast to diversified and more bond-heavy allocations.

A quick note here on an important word in the preceding sentence: diversified. For much of recent market history, diversification as an allocation principle has not been overly rewarded. As market breadth and concentration has narrowed it has been a smaller and smaller subset of markets, sectors, and companies that have propelled the market onward, while other neglected sectors have lagged. Often, diversification has felt disappointing. But in recent months, diversification has been well rewarded as market dynamics have shifted and different assets have begun to move in different directions.

We saw that in clear relief during February’s turbulence as technology and risky segments sold off while international stocks, bonds, and more defensive stocks held up. This is a welcome reminder that diversification remains a solid principle around which to construct a portfolio. Spreading allocations across a variety of asset classes, geographies, and vehicles is an effective strategy to reduce the idiosyncratic risk of having a lot of eggs in a single basket. This helps to smooth out what might otherwise be a bumpy ride, which is exactly what we saw in February. Diversification is the bedrock of our asset allocation process at Boston Wealth Strategies, one that we stick with across all market environments, and one that we feel will serve us (and our clients) well into the future. February’s sell-off has provided a welcome reminder of this fact.

Next month we have the usual slew of economic releases, as well as the FOMC meeting on the 19th. We will be watching closely and will keep you posted as developments arise. As ever, we sincerely appreciate your trust and support.

Sincerely,
Jason D. Edinger
Chief Investment Officer
Boston Wealth Strategies

* Disclosure: Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

February 7, 2025

After concluding 2024 on a challenging note, equities ended January higher, with the Dow Jones Industrial Average leading the way (+4.8%) and the S&P / NASDAQ just slightly behind (+2.8% and +2.3% respectively). Small-caps also notched gains, although they remain underwater from December’s 8% drawdown. Interestingly, market breadth and participation improved materially during the month, with the equal-weight S&P index outperforming the official index by nearly ¾ of a point. This was a welcome about-face from the poor breadth and participation seen in 2023 and 2024, where technology stocks – specifically the Magnificent 7 – enormously outperformed the rest of the market. Still, the legacy index reached several new record highs during the month to close just below all-time highs. Historically, when stocks have risen in the month of January, the calendar year has ended in positive territory approximately 85% of the time. Very healthy.

The impressive performance in equities came on the back of mostly positive developments out of Washington, D.C. Both pro-growth and deregulatory polices unleashed pent-up animal spirits, which combined with a minor dip in bond yields provided stocks with some relief. These supporting dynamics were weighed against new and potentially larger tariffs against Canada, Mexico, and China, which were the topic of much argument despite not being officially announced until early February. Although these aggressive and nationalist policies were somewhat priced in after Donald Trump’s November election win, any surprises or new tariffs against other counties could result higher volatility in the coming weeks.

The artificial intelligence revolution encountered a setback in January, as China’s AI darling startup DeepSeek ignited a sell-off in the technology sector after it’s relative affordability challenged the sky-high CAPEX spending rates for US companies such as Nvidia Corp. This called into question the extent of US dominance in the space and America’s leadership in the global AI race. The market reaction was swift and violent, with Nvidia falling 17% on Monday the 27th, shedding billions in market cap and falling below its 200 daily moving average (DMA) for the first time in 2 years. Nvidia’s market cap loss on that day alone was greater than the market cap of 487 companies within the S&P500. Still, by the end of the week, the markets enjoyed a nice rebound and clawed back some of their losses as DeepSeek’s cost savings appeared to be somewhat “exaggerated.”

Moving on to the Federal Reserve, the central bank did what everyone expected it to do: held interests steady in the 4.25-4.5% range, noting that inflation remains sticky and unemployment has stabilized at a low level. Market reaction was muted, as this meeting and ensuring press conference was mostly quiet and uneventful. Still, Chair Powell did mention that the bank was in no hurry to cut rates further, and most market participants see the Fed holding until at least midyear. It seems that the Fed pause is finally upon us.

In terms of economic data, it was a mixed bag with core inflation coming in slightly ahead of expectations while headline inflation was slightly lower. Much of this sticky inflation is a result of the strong and resilient American consumer, which combined with the tight labor market has provided ongoing support. As is often said, if people have jobs than people have money. And if people have money, they will spend it.

Corporate earnings were also mixed in January, with 36% of S&P500 companies having reported though end-of-month. Of these reporting companies, approximately 77% have boasted earnings per share (EPS) above estimates, especially in the financials and communication sectors. Overall, corporate earnings appear solid but not spectacular, and we will be keeping a close eye as February concludes the Q424 earnings season.

Looking forward, we have the usual slate of monthly economic data (employment, inflation, and GDP), any disappointment in which could be the catalyst for continued market volatility. Perhaps even more important will be ongoing and ever-changing developments with respect to tariffs on trading partners, namely Mexico, Canada, and China. From a seasonality standpoint, February tends to be in the bottom 1/3 in terms of historical monthly returns, averaging just 0.15% over the last decade. We will remain vigilant and react to new data as necessary. Until next month, we thank you greatly for your ongoing trust and support.

Sincerely,
Jason D. Edinger
Chief Investment Officer
Boston Wealth Strategies

February 3, 2025



January 7, 2025

Santa Rally Fails To Materialize But Stocks Log Epic Year

Stocks ended 2024 with a whimper, as the S&P500 lost -2.4% in December to close at 5,882. The fabled “Santa Claus rally,” which generally sees the market post strong gains in the final days of the year, was not meant to be this time as a combination of profit-taking and rebalancing resulted in December losses. Nonetheless, the fourth quarter and calendar year were strongly positive, with the benchmark index gaining 25% in 2024 and registering 57 new all-time highs. This strength comes on the back of a solid 2023, and the market’s two-year performance is the best in nearly 25 years. Despite Santa’s conspicuous December absence, equity investors were indeed on the good list this year and were rewarded accordingly.

Looking under the hood, 2024 was a story of large-cap domination, with mega-cap names outperforming the broader S&P500 by more than 8%. The “Magnificent Seven” stocks turned in another blockbuster year, gaining 67% in 2024 and representing 55% over the overall market return! This dynamic has been consistent over the last several years and reminds us that concentration risk in the broad indices remains a key consideration for asset allocators. Small- and mid-cap stocks performed well on an absolute basis, registering double-digit gains but lagging far behind their large-cap brethren. “The bigger the better” as they say.

The Federal Reserve cut its benchmark interest rate by a quarter point in December, just as expected. This reduction came despite increased inflation expectations, with year-end estimates for 2024, 2025, and 2026 all being revised higher. Arguably more important than the cut itself, the bank’s messaging implied fewer cuts in 2025, which has landed squarely front of mind for many investors and market participants. Immediately following the announcement, bond yields rose – especially in the 2–3-year maturity range – which reflect the market’s expectation of a “Fed pause.” The bond market, commonly referred to as the “smart money,” is clearly telling us that it has concerns over the Fed’s ability to push inflation lower from here. Accordingly, the month of December and the entire fourth quarter were challenging for bonds, as rising yields forced prices down resulting in modest losses across the major indices. The Bloomberg US Aggregate index fell -1.64% during the month, but still managed to close 2024 in the green with a meager 1.25% total return.

Alternative investments – namely gold and cryptocurrency – were in the headlines all year long. The former, although slightly down in December, was the bright and shiny star amongst alternatives in 2024, turning in a +27% year and outperforming the S&P500. This was the precious metal’s best year since 2010, and was fueled mainly by incessant central bank purchasing, easing monetary policy and geopolitical strife. This strong performance for gold was achieved in spite of traditional headwinds in the strong US dollar and rising bond yields.

Bitcoin also attracted major attention during the year, as the launch of several ETFs catapulted the digital asset into the mainstream. One particular bitcoin ETF has seen its assets under management grow to $50B in less than a year, making it arguably one of the most successful new product launches ever. BTC’s price rose 100% in 2024, driven by the above ETF adoption (and associated inflows), general risk-on positioning, and pro-crypto sentiment on the part of the incoming administration. Rumors of President Elect Trump using bitcoin as a reserve asset on “day one” of the administration have only added fuel to the fire.

Looking forward, investors are relying on robust corporate earnings as the primary means for the bull market to continue. Earnings are forecasted to grow 2.1% in 2025, which should provide support for equities at current or slightly higher valuations. But we must always be prepared for the unknown, which is everywhere around us as we enter the new year. Of particular note are the effects of the incoming administration’s policies on international trade, immigration, deregulation, and taxes (among others). As ever, we will do our best to be prepared for a wide range of outcomes, and position portfolios accordingly. While we cannot predict what 2025 will bring, we can and will stick to the knitting which has served us so well in the past: a well-reasoned, disciplined process that is adhered to across all market environments.

We are excited to embark on another year with our valued friends, family, and clients. We hope it is fruitful and prosperous for all. Until next month, we wish you a happy new year and thank you for your ongoing trust and support.

Sincerely,

Jason D. Edinger

Chief Investment Officer

Boston Wealth Strategies

December 6, 2024

Black Friday concluded the final day of November trading, and the holiday-shortened session put an exclamation point on a
tremendous month for equities. Following a quick and conclusive election – which saw Republicans advance in almost all categories
– markets staged a relief rally to close the month at new all-time highs. The S&P500 rose 5.9% during November, posting its best
month of the year. In a change of trend, small-capitalization stocks also participated, with the Russell 2000 gaining 11% (!) to deliver
its best month in nearly a year. This stellar performance in the wake of November 5th should come as no surprise; the market tends
to rise post-election as uncertainty has been eliminated. As the chart below clearly shows, the more that time passes after the big
day, the smoother the ride becomes for stocks (and bonds).

Source: “Elections, The Fed, and Uncertainty: Navigating the Fixed Income Market”; Weitz Investment Management

Election results were clearly the primary driver of November performance, as the market quickly priced in expectations for further
tax cuts, additional fiscal support, and government deregulation. Presumably, all the above are positive for economic growth and by
extension, future market performance. On the tax front, it is all but assured that the 2017 Tax Cuts & Jobs Act will be extended.
Additionally, President Elect Trump has proposed even further corporate tax cuts (from 21% to 15%), which could maintain margins
and boost S&P500 earnings by 4-5%. While Trump’s cabinet selections have received mixed reviews, the market cheered on the
nomination of Scott Bessent to Secretary of the Treasury, noting the former hedge fund manager’s reasonable and pro-growth
stance. All told, the markets received an undeniable boost from the election and while the devil remains in the details, the initial and
ensuing reaction has been highly positive.

The other major development in November was the further normalization of monetary policy on the part of the Federal Reserve.
The central bank cut interest rates by a further 0.25% which brought the target to a range of 4.5-4.75%. Given the backdrop of
strong economic growth and a sturdy labor market, this was entirely expected and well-received by the market. Fed Chair Powell
indicated that the trends of a good economy, cooling inflation, and normalizing labor market looked poised to continue. Notably, he
also reiterated that the committee remains “data dependent,” and that future rate decisions would be made from meeting to
meeting. Accordingly, the yield on the 10-year Treasury fell from 4.39% to 4.19%.

Economic data came in mostly strong, delivering even more market optimism. Q3 GDP data was unchanged from its initial estimate
and showed growth clocking in at a 2.8% rate. Personal incomes and spending also ticked up marginally, reinforcing the notion that
the American consumer remains on solid footing. Inflation readings were slightly mixed, with both the CPI and PCE Index (the Fed’s
preferred measure) in line with expectations. Jobs data were also mixed but consistent with a strong, although slowing, labor market
(October data included one-time effects of hurricanes and a strike at Boeing). All told, there was nothing in the monthly data to
spook markets or knock them off their upward course. Good news for bulls.

Looking forward, the next key piece of data will be the November jobs report, which will give the Fed insight into labor market
trends. We also have the usual inflation metrics, which will be weighed heavily during the next Fed meeting, taking place December
17-18. Finally, market participants are already looking through to the next quarterly earnings season, where expectations are high.
Many analysts are expecting the strongest quarterly growth in three years. All these pieces will collectively determine the market’s
next move and will serve to set the stage for 2025 direction.

This will be our last writing of 2024. It has been a pleasure to share our thoughts and insights during a magnificent and truly stellar
year. As the sun sets on 2024, we wish all of you the happiest of holidays and continued prosperity during the new year. As ever, we
thank you for your ongoing trust and support.

Sincerely,
Jason D. Edinger
Chief Investment Officer
Boston Wealth Strategies

November 7, 2024

October ended with a downturn for the major indices, which were spooked by mixed corporate earnings, increasing bond yields, and the looming presidential election. The S&P500 gave back modest ground during the month, losing -0.92% during the period to close at 5,705. Small capitalization stocks fared even worse, losing -2.6% while correlating strongly with higher interest rates. As economic data continue to come in strong, rates have risen accordingly, and small caps have struggled. October concluded with sharp losses and pounded nails in the winning streak coffins: it was the first negative month since July for the NASDAQ and both the Dow and S&P500 had five-month positive streaks snapped. Boo-hoo.

Volatility increased markedly during October, as investors jockeyed to position portfolios ahead of the presidential election. Rates and bond markets showed the highest relative volatility, as yields have surged on the back of inflationary campaign rhetoric and decreased expectations for future rate cuts. During the month, yields across the curve backed up around 0.5% depending on the precise maturity. This put pressure on bond prices and resulted in losses across all the major bond indices. During the 1.5 months since the Fed began the easing cycle, economic data have continued to come in strong and cast doubts over how many cuts that the market has priced in. Stuck between a rock and a hard place, Chair Powell has his work cut out for him if he is to deliver on both amount and size of market expectations.

Powerful headwinds to lower future interest rates have come in the form of ongoing economic strength, minor but sticky inflation, and a sustained low unemployment rate. None of the October data contradicted these points:

• October payrolls were weak (+12K jobs created) but resulted in no change to the unemployment rate
• September inflation came in slightly hotter than anticipated (0.2% monthly versus 0.1% expected)
• Headline GDP came in slightly weaker (2.8%) but personal consumption, which accounts for 2/3 of the economy, came in at a strong +3.7%

In keeping with the above, the Federal Open Market Committee is widely expected to reduce its target Federal Funds Rate when it meets November 7^th, most likely by 0.25%. Nevertheless, investors have clearly recalibrated their thinking relative to how aggressive the central bank will be in cutting rates over the next cycle. Accordingly, we expect volatility to remain elevated in the near term.

Gold and other precious metals continue to grab headlines as their blistering rallies continue. Physical gold rose +4.2% during the month and hit multiple all-time highs after storming nearly 6% higher in September. While we have seen furious demand on the part of global governments and central banks, recently we have seen a safe-haven trend emerge ahead of the election, which still appears too close to call. Gold is up an incredible 33% this year, arguably sparking even more demand and resulting in an upward, virtuous cycle. Moving forward, potential tailwinds for gold and metals include global monetary easing, sticky inflation, increased fiscal imbalances (deficits), associated dollar debasement, and geopolitical conflict. Not to mention the ever-present FOMO!

As of this writing, we are less than 24 hours until Election Day. Naturally, there is a lot of political noise dominating the landscape. While we would not be surprised to see heightened volatility in the immediate aftermath of the election,  we do recognize that markets tend to look through elections to quickly and efficiently price in any major policy implications. And the further we travel away from the big day, the smoother the ride tends to be for both stocks and bonds. We rest assured knowing that time is the great equalizer.

Outside of the election, the economic data continue to point to a soft landing with no recession. The Fed is telegraphing that it intends to continue its loosening policy, outside of major dislocations in terms of employment and/or inflation. It is widely expected that the bank will cut interest rates a further 0.25% while awaiting crucial economic data before the final December meeting. From a seasonal perspective, November has been the best month for stocks over the last decade and has posted an average return of 3.81%. Not shabby. Either way, November 2024 will likely be an epic month in many regards, and we stand watchful with our investment processes firmly in place.

We wish you a very early Happy Thanksgiving and as ever, we thank you for your ongoing trust and support.

Sincerely,

Jason D. Edinger

Chief Investment Officer

Boston Wealth Strategies

October 4, 2024

Financial markets defied typical September weakness – often the worst-performing period of the year – to conclude a winning month and quarter. The S&P500 closed at a record level, gaining 2.1% to post its first positive September in five years. The bellwether index has now risen a fourth consecutive quarter and has delivered the best start to a year (22%) since 1997. Although markets endured a rough start to the historically weak month, investors were able to climb the wall of worry and push the indices higher, mostly on the back of an interest rate cut domestically and massive Chinese stimulus internationally.

All eyes were on the Federal Reserve, and the bank did not disappoint. The committee cut short-term interest rates by an outsized 0.5%, dialing back restrictive monetary policy as it sees inflation clearly within the crosshairs of its 2% target. Additionally, the Fed noted minor weakness in the labor market, with the unemployment rate slowly rising over the past 12 months. Accordingly, Chair Powell declared that “the balance of risks” between inflation and employment “are now even,” and thus began what appears to be the slow recalibration of monetary policy to something more “normal.” The market anticipates at least another 0.25-0.5% of cuts this year, with the next Committee meeting scheduled for November 18th.

Overseas, China took center stage as the government threw about any measure of stimulus possible against the wall. Responding to economic indicators that remain bleak, China announced a broad range of aggressive stimulus measures designed to inject liquidity into the economy and raise the country’s real GDP output. The Chinese stock market reacted instantly, ripping higher with the Shenzen 300 Index rallying 25% over the next several trading days. To end the quarter, mainland Chinese stocks turned in their best day in 16 years (up 8%) and capped a nine-day winning streak after key economic data came in better than expected. While the effects of this stimulus will take time to fully work their way through the system, the short-term reaction has been to ignite momentum overseas and contribute to the risk-on posture in global equity markets. What they threw seems to have stuck. For now.

Strength in precious metals also made headlines during the month. Physical gold prices stormed 6% higher in September, notching multiple record highs and posting the best quarter for the “barbarous relic” in more than eight years. After numerous daily record highs, bullion ended the month at $2,668 per ounce and continues to lead commodities this year. This is unsurprising, as gold and other metals tend to benefit in response to declines in interest rates (see paragraph 2) and inflationary conditions (see paragraph 3). Investor concerns over escalating geopolitical tension, notably in the volatile Middle East region, also helped the safe haven commodity’s surge higher. Silver, not to be outdone, delivered an even more impressive rally, gaining 9.5% on the month.

Looking forward and given the blistering performance in recent months, we would not be surprised to see some price consolidation as the market catches its breath after so much sprinting. Given the year-to-date gain in the broad markets, the S&P500 is now somewhat richly valued and is trading around 21.5x forward earnings. There is the possibility that prices could retrench in the fourth quarter, particularly when considering tense relations among the major Middle East players and an uncertain picture around the US presidential election, now just barely one month down the road. Lastly, in a major development which has received little coverage in the mainstream press, dockworkers in major US port have begun to strike, which was unforeseen until recently and which could have lasting negative economic implications if that situation were to drag on or become worse.

Nevertheless, the more intermediate-term picture is characterized by cheap energy, policy stimulus at home and abroad, and corporate earnings which are projected to grow modestly. This all feels positive for global markets, but we may be forced to contend with short-term volatility as some of the more dubious factors sort themselves out in the coming weeks.

We wish you a great first full month of fall, and as ever, we thank you for your ongoing trust and support.

Sincerely,

Jason D. Edinger

Chief Investment Officer

Boston Wealth Strategies

September 13, 2024

After hitting all-time highs in July, cracks began to appear during the month of August. The unofficial last summer month began with a ferocious sell-off, resulting in the S&P500 dropping 6% during the first three days alone and the Magnificent 7 falling almost 10% during the same period. It was the worst start to a month in over 20 years and was owed largely to growth concerns after the July payrolls report came in much lighter than expected. Other key pieces of data suggested that the economy is softening, and the Federal Reserve has kept interest rates too high for too long. Contagion in Japan related to its currency and interest rate contributed to the sour mood and elevated volatility, with the VIX spiking to its third-highest level ever seen. Not a fun start. 

Yet in just 11 trading days following that steep decline, the market fully recovered and ascended toward the record July peaks. This rally was based on stronger-than-expected economic data combined with the near-guarantee of interest rate cuts in the coming months. Throughout August, the Federal Reserve signaled that it would likely cut interest rates in September – with recession risks low and core inflation in line with expectations. During his highly anticipated speech in Jackson Hole, Fed Chair Powell confirmed that he was confidant in the directionality of inflation data and would shift the emphasis to supporting the labor market and therefore “adjusting” monetary policy. Essentially, he said that inflation has been tamed and it is time to start reducing market interest rates. Both stock and bond markets rallied aggressively as a result.

Chair Powell is not wrong. The US economy indeed remains modestly strong. While unemployment did tick up in July, it is still low by historical standards and when combined with decent GDP growth and moderating inflation, it does appear that the economy is primed for the coveted soft-landing scenario. The above economic data, combined with the widespread view that monetary policy is far too restrictive, suggest that the Federal Open Market Committee will reduce its benchmark rate by 0.25% in September, followed by a further 0.25-0.5% by year-end. Given the political elements involving the November election, it is unlikely that Chair Powell or the committee will deliver any surprises here. We believe the committee will stick to the script whilst simultaneously remaining data dependent. Rate cuts, here we come!

Looking forward, we are heading into a seasonally challenging time, with September being the most volatile month of the year historically. Over the last five years, the S&P500 has delivered a negative average return of -4.2% during month number nine. Perhaps this time is different with an interest rate cut due on the 18th. Certainly, the market is saying as much, with the odds of a September cut approaching 100% in betting markets. The question becomes: will it be a 0.25% or a 0.5% reduction? The possibility of a 50bps cut remains on the table if certain key economic reports, namely jobless claims and nonfarm payrolls, do not meet expectations. We also must contend with “triple witching” on the 20th (derivative expirations on options, index futures, etc.) as well as the November election, which has begun to loom large.

Given the above combined with a seasonally weak time period, we would not be surprised to see additional volatility in both stock and bond markets. That being said, we are positioned for whatever the market will throw at us, and we stand ready to react accordingly. As ever, we thank you for your ongoing trust and support.

August 20, 2024

Like Independence Day fireworks, equity markets popped off in July, with the S&P500 notching its 10^th consecutive monthly gain and tagging its 38^th all-time high during the month. Impressive. Beneath the hood however, the price action was choppy and rotational, with investor interest shifting from the crowded mega-cap tech space to smaller companies. The stars of July were undoubtedly small-caps, with the Russell 2000 surging 10.2% during the month on the back of softer inflation data and the near certainty of a rate cut. The epic rotation from large to small was historic and narrowed the gap between large- and small-cap performance this tear to just a few points. It remains to be seen whether or not July marked the start of a regime change, but market action during the month did underscore that diversification within asset classes is just as important as diversification between asset classes.

On the bond side of the ledger, we have seen yields trending down for several months now, and that continued in July. Weighed down by softening economic data and market expectations of a September interest rate cut, yields fell broadly in July and fixed income performance was uniformly positive, with the Bloomberg US Aggregate Index gaining 2.34% during the month. Of course, all eyes were on the Fed which concluded its two-day meeting on the last day of the month. The central bank held its benchmark rate steady in the 5.25-5.5% range, but held the door wide open for a cut during the September meeting. The market is currently pricing in a 100% probability of a September cut, signaling to the bank that the deal is effectively done. Given Fed history of doing exactly what the market expects, it is highly likely that September will see the first interest rate cut since the COVID-19 time period.

In terms of economic data, the June nonfarm payrolls report beat on the headline number, but more importantly it showed that both April and May numbers were revised lower. Accordingly the unemployment rate ticked higher as we are beginning to see signs of a cooling labor market. This should provide cover for the Fed to move forward with its interest rate cutting campaign. On the inflation front, the headline reading for June fell -0.1% to an annualized of only 3% increases. While this is indeed positive, it does show the challenges facing the Fed and its inability to reel inflation in to the bank’s stated goal of 2%. It is looking like we will all need to become comfortable with an annual inflation number north of 2%, as additional progress to lower prices appears to have stalled out.

Looking ahead, the month of August will be led by Fedspeak and corporate earnings, which thus far have been mixed. The standard slate of economic releases will give us clues on inflation, employment, and also personal consumption. In the back half of the month, the annual Jackson Hole Economic Symposium take place, which should generate some headlines. In the interim, the markets have a lot to digest, and we would not be surprised to see volatility return during the last full month of summer.

We thank each and every one of you for your ongoing trust and support.