October Newsletter to Clients

Enjoy this month’s edition that features a review of past market performance after the Fed starts lowering interest rates plus a summary of an alarming Vanguard study about switching jobs and the impact on some people’s retirement savings.

As I wrote in last month's newsletter, the Federal Reserve lowered the benchmark interest rate by .50% last month. As it has a dual mandate of maximum employment and price stability, lowering the interest rate by that much implies the Fed believes inflation is close to where they’d like it to be, so they’ve turned their focus to heading off any weakening in the jobs market. So, what happens to the stock and bond markets historically after the Fed starts decreasing interest rates? 

According to data by Bloomberg Index Services Limited gathered over the past 7 cycles since October, 1984, markets have performed as below after the Fed made its first rate cut:

•    The Bloomberg U.S. Aggregate Bond Index rose 6.3%, on average, over the first 6 months following the initial rate cut. It returned 10.0% in the year after the first rate cut, on average. Among our funds, Dodge & Cox Income (DODIX) and Loomis Sayles Core Bond Plus (NEFRX) both use the Bloomberg Index as their benchmark;
•    The S&P 500 Index of large, U.S. stocks averaged a 6.1% return in the first 6 months after a rate decrease. It returned an average of 9.3% through the first full year after the initial cut. T. Rowe Price Blue Chip Growth Fund (TBCIX) and Fidelity Contrafund (FLCNX) both use the S&P 500 as their benchmark;
Unfortunately, past performance is neither a reliable indicator nor a guarantee of future results. 

On the flip side, J.P. Morgan says stock market returns over the next decade are likely to be ho-hum, maybe even half-hum, because stocks are expensive now, in their opinion. How do we measure expensive in the stock market? We look at Price to Earnings ratios – or, how much will $1 of earnings cost? The S&P 500 trades at roughly 23.7 times earnings versus a 35-year average of 19 times earnings. Meaning, we currently pay $4.70 more for $1 dollar of earnings than the average cost over the last 35 years. As a result, J.P. Morgan predicts the S&P 500 will earn an average return of just 5.7% over the next decade. 

But, of course, past performance is neither a reliable indicator nor a guarantee of future results.

So, with this conflicting data, what do we do? Two things:
1.    We structure your portfolios for your individual goals and needs;
2.    We diversify your portfolios with mutual funds that buy bonds, large companies, small and mid-sized companies, real estate companies and international companies. J.P. Morgan thinks high stock prices will limit returns of large, U.S. companies over the next decade. International companies, however, have a Price/Earnings ratio of just 14. That doesn’t mean international companies will return more than U.S. companies but it does mean they are relatively less expensive and that they should be included in our portfolios. 
Changing jobs? A recent study by Vanguard showed the majority of people switching jobs wind up putting less of their pay into their 401(k)s, often without realizing it. Over a four-decade career that can mean as much as $300,000 less in retirement wealth. What did Vanguard find happens?
•    64% of job-switchers got a raise, but only 44% maintained their savings rate;
•    More than half of auto-enrolled workers remained at the default savings rate within the first year in a new job;
•    In 401(k) plans that require workers to sign up on their own, nearly 25% failed to do so.
Switching jobs? Let us help you enroll in your 401(k) and advise you on your savings rate.

Thank you for your continuing confidence.