Prosperity Capital Advisors 4Q24 Capital Market Intel Report
Most every quarter Dave Alison provides a 4Q24 capital market intel report. He's President of Prosperity Capital Advisors, the Registered Investment Advisor firm Tim Haas CFP® CIMA® RMA® EA MBA represents as an investment advisor representative. The firm provides Tim with several portfolio managers to choose from to help clients reach their unique goals. This 4Q24 Capital Market Intel Report gives a nice market overview to keep you updated and informed.
Becoming aware of periodic market influences is important. However, understanding client personal goals, timing and volatility tolerance is even more important for positive client outcomes. As a Certified Investment Management Analyst™️, Tim is trained in behavioral finance in addition to portfolio selection and management. CIMA® is an important credential, whose continuing education Tim uses to assist clients in making wise investment choices and decisions to meet their needs.
Please take twelve minutes to review this video on market perspectives and book a call with Tim for any questions or to learn about The Bucket Plan and other tools used to help create a secure financial lifestyle.
Transcript of 4Q24 Capital Market Intel Report
Hello, this is Dave Alison, president and co-chair of the Investment Committee at Prosperity Capital Advisors, and I want to welcome you to our fourth quarter 2024 Market Intel Report. The third quarter was certainly filled with volatility around the upcoming presidential election, geopolitical events, and the Federal Reserve's monetary policy changes in the balance on fighting inflation. Keeping the economy and jobs market hot, but we saw positive returns through Q3 with the S&P 500, posting an almost 6% return. The Dow Jones Industrial Average leading the way at over 8% and the tech heavy NASDAQ index returning almost 3%. Those on top of a hot start to the first part of the year have led to good calendar year returns so far with both the NASDAQ and the S&P 500 up almost 20 percent year to date. Of course, all of this in light of uncertainty around the presidential election. Of course, as I mentioned earlier, geopolitical risks and the Federal Reserve's rate cutting cycle that is just beginning.
And so, in this video, we're going to talk about the three key themes on the minds of investors today.
Those being What could the start of this Federal Reserve interest rate cutting cycle mean for investors? How have markets performed in months surrounding a presidential election? And then last but not least, why should investors think about market volatility as an opportunity? So, let's go ahead and dive
What Could the Start of the Fed Rate Cutting Cycle Mean right in.
The first theme that I want to talk about is what could the start of the Fed rate cutting cycle mean for investors?
As we know, in September, the Federal Reserve kicked off its highly anticipated rate cutting cycle with a 50 basic point reduction. Now, what we typically see is, is when the Federal Reserve starts to cut interest rates, cash yields, which is the amount of interest that you make on holding cash, start to fall quickly. In fact, history shows us that cash yields decline rapidly following the start of a cutting cycle, falling by 2 percent on average just 12 months later. Now the significance of this is there is a historic amount of cash still sitting on the sidelines. Many of those investors were happy earning their 4 or 5 percent interest rate on cash.
Now in hindsight, had that money been invested in the market, as I just shared with you earlier, equity markets are up 20 percent year to date, of course more diversified portfolios, are up somewhere between probably 5 percent and 20%, depending on the asset class. And so, cash certainly didn't outperform the markets so far in 2024, but it's been a nice safe haven for liquid money that you don't want at risk.
Well, what we typically see when cash yields start to fall, those investors look to redeploy that capital where they can earn a more meaningful yield. And that could be a boon to equity markets. If some of that five plus trillion dollars of cash sitting on the sideline starts getting deployed to things like the stock market, it could accelerate the momentum and price activity of stocks in general.
Some of the interesting data points on what the market has done when the Federal Reserve starts putting interest rates, could be a telling sign for what's ahead. Now, as we all know, history is no guarantee of what will happen into the future, but if we look at the average stock return, twelve months after the Federal Reserve has started to cut interest rates, we've seen that going back all the way since 1974, the market has produced an average return of about 7.2%, the 12 months after the first interest rate cut.
Now, depending on whether the economy avoids a recession or not within the year has led to starkly different returns. If we look at time periods where the Federal Reserve starts to cut interest rates, but we are not in a recession, nor do we go into a recession in the following 12 months, the stock market has produced in 19. 6 percent average return. Well, contrast that to a time period where the Federal Reserve begins to cut interest rates because we're in a recession or we're going into a recession. And 12 months later, the stock market produced a return of negative 2. 7%. So, average return of about 7. 2%.
In times where we're not going into a recession, really bullish returns on the stock market, but in times where the Fed is cutting interest rates because we are going into a recession or have a lot of economic uncertainty, negative returns for stocks over the following 12 months. But it's really important as a long-term investor to zoom out because three years or five years later, if you look at that blue line, the average Market return three years after the Federal reserve has started to cut interest rates is 41 percent and a five-year cumulative return of over 77%.
Even if we are heading into a recession -- or we're already in a recession -- three years after that first cut, positive 18 percent return. Five years after that first cut, positive 57 percent return. So again, we want to make sure we're maintaining a longer-term perspective with our investment strategy. If you have short term money, money that you may need -- or will need sooner rather than later -- money for income in retirement over the next couple years, or your emergency fund, then cash might be a great asset class to keep that in. But if you want to maximize the growth and return of your money) and you have the right time horizon), then now could be a good time to continue to stay the course with your longer-term strategic asset allocation plan. And the flip side is -- as of today -- the economy shows no signs of an imminent recession. But as we all know, this has the potential to change.
US Presidential Elections and Historical Patterns in Market Volatility.
The next thing I want to talk about is the United States presidential elections and Historical patterns in market volatility and returns. You see, politics are incredibly important for individuals, as we see why some people get quite passionate over politics. But it's not really for the stock market. The stock market is an incredible information processing machine that is processing all kind of data points in a company's ability to produce future cash flow and earnings Politics play into that. Of course they do, but they're just one of many, many factors.
One thing that we have seen in historical patterns around election years is that as we lead into the November election date, we see increased volatility in the stock market. If you look at the chart that I'm going to put up in the video, the dark blue line represents the average monthly volatility in an election year, whereas the blue bar represents the average monthly volatility in a non election year. You can clearly see that as we approach election day, September, October, November, we see a lot of heightened or increased volatility in the stock market. Once election day comes and goes and the results are in, we start to see that volatility dissipate. Similar trends can be seen in stock prices, which on average have been choppy beginning in September and lasting into the November election. But, Post election, through the end of the year, we typically see a rise in stock prices. On average, an investment made on November 1st of an election year has rallied over 16 percent in the preceding 8 months after an election and it went on to gain 11. 6% Over the next decade on an annualized basis.
So if you're asking yourself, is now a good time to be in the markets or maybe you have some cash on the sidelines, as you can see here, based on historical data, we've typically seen an increase in stock prices, but we've also seen And the last theme I want to talk about is how periods of elevated volatility may, in fact, represent an opportunity for investors.
You see, the VIX, which is the Volatility Index -- often referred to as the fear gauge in the stock market -- is a real time measure of expected near term volatility. As you can see in some of the historical examples, during the global pandemic, the VIX was over 55. When the tech bubble burst in 2002, it was between a range of 45 and 55. When the markets reacted to 9/11 in 2001, it was between 35 and 45. Why this is important is that volatility is a feature of investing. Not a defect, however, many investors instinctively view it as something to fear and avoid. When markets become volatile, people think they should cash out or go to more risk-off assets. And that can actually lead to subpar long-term performance and results. Using the daily closing price of the VIX, an investment made at any level had a solid average one year return of 9.7%.
However, an investment made on days where the VIX was elevated, performed meaningfully better. So the note here is that investors could benefit from thinking of the VIX as an opportunity index -- because while it's always a good time to invest -- history actually shows that some of the best opportunities have come during periods associated with elevated volatility. If you look at time periods where the VIX was 55 or higher, the following one-year return was 31.7%. If you look at times when it was 45 to 55, the following one-year return of the S&P 500 was almost 33%.
So This just goes to show you that behavior is one of the things that can really help ensure that you meet your long-term goals and objectives when it comes to investment performance. It might seem counterintuitive, it might make more sense to cash out when times get volatile, but in fact, the opposite proves true when we look at these historical trends. So, if you have any questions at all, please don't hesitate.
Reach out to your advisor. They're here to help talk about your portfolio construction and ensure that your investments align with your volatility tolerance and put you in the best place to achieve your goals and objectives. Thank you so much and we'll see you next quarter. At the time of delivery and any subsequent publishing, information was deemed reliable but is subject to change by the time of listening or viewing.
The contents of this piece include options and Projections of C2P, are subject to change, and are for informational purposes only. The information provided in this presentation is not intended to be individual investment, tax, or legal advice.