NOVEMBER 2024 CLIENT NEWSLETTER
Long-Term Rates Spike Ahead of Election: What Comes Next?
I held off sharing this month’s video and newsletter because I wanted to wait until after I knew the results of the election on November 5 and the markets’ reaction. Ahead of the election, the stock market stayed calm, but the bond market didn’t. Could that trend continue?
As you know, for the past year and a half, a lot of big tech companies – primarily those
developing new artificial intelligence products – have fueled stock market growth, particularly on the S&P 500, which by early November was up about 20% for the year.
1 If you took these tech companies out, it’s likely the S&P would only be up by 6-7% instead of 20%.
But it’s not just the tech boom that has been driving Wall Street’s growth. The Federal Reserve has also helped by hinting all year they would likely start cutting interest rates and then following through, beginning with their September cut of a half-percent. The Fed cut rates again by another quarter percent two days after the election, even though the results of the election make the economy’s future direction harder to forecast. The Fed stuck with its plan to lower rates again based on some new economic data suggesting the economy is continuing to slow.2
10-Year Bond Rate Rises
Despite the Fed’s first rate cut in September, long-term interest rates actually rose in October, with the rate on the 10-year government bond climbing from about 3.8% at the start of the month to around 4.4% by the end.3 Normally falling short-term rates help pull long-term rates in the same direction, and this opposite occurrence probably had a lot to do with investor uncertainty leading up to the election. Although the election is over and a lot of that uncertainty is now gone, some remains.
For example, investors are well aware that Trump has dramatically different economic policies than those that have been in place under Biden and Harris. The good side of that is that they probably believe Trump’s policies are more business-friendly and could help spur more growth. The bad side is that there are new questions now around inflation, which has just recently comedown close to the Fed’s target rate of 2%.
Some economists worry that Trump’s policies could cause inflation to start rising again, and that’s probably one reason why the bond market has seemed so skittish despite a relatively strong economy currently and the Fed actively lowering short-term rates. With that said, long-term rates did drop again slightly following the Fed’s latest cut. Ultimately, the Fed is just trying to be very proactive in its effort to head off any possibility of a big economic downturn, which is exactly what they’re supposed to do.
Your Portfolios
So how does all this affect your money? Well, as noted, long-term rates did rise again in October despite all the Fed’s efforts, and – as you know – typically when long-term rates rise it’s bad for bonds and bond-like instruments. The good news is that our most conservative portfolios of bonds and bond-like instruments – which is where most of you have most of your money – are still up by about 7% for the year on average, depending on your individual holdings. That’s down only a little over 1% from a month ago despite October’s rate spike, and it’s still at the high end of our target goal. So, again, that’s good news.
What’s also good is that – considering all the factors – I believe long-term rates have peaked or will peak very soon and start coming back down again. If so, we could see our average growth rate rise even a bit higher than 7%. The bottom line here is simply that the markets don’t like uncertainty. And even though an administration change always brings new uncertainties, at least The Big Question has been answered now that the election is over. What’s more, historically the markets always tend to do well in the months following an election no matter who wins, and I think we’ll see that trend play out again this time around.
Of course, the best news, as I always remind you, is that at the end of the day, when you’re
investing with an income-first, growth-second mindset and strategy, you can rest easy knowing that any fluctuations in your asset values are only temporary because your principal is protected, and your income return is unaffected. And if you’re reinvesting all or part of that income, you are dollar-cost-averaging your way to more income growth in the future!
As always, if you have any questions, please call our office at any time. Have a Happy
Thanksgiving!
1 S&PGlobal.com
2 “Fed Cuts Rates Again,” New York Times, Nov. 7, 2024
3 MarketWatch.com