MLD Market Update – August 2024

Join Chad Larson, Senior Portfolio Manager, as he gives his thoughts on the market for August 2024.

Welcome to August’s Money Matters, where Chad Larson shares his insights on the recent market correction and provides valuable perspectives on the current economic landscape.

Understanding the Recent Market Correction

The markets have experienced a notable pullback, with the S&P and Nasdaq seeing sharp corrections. However, it’s essential to put this into perspective. Even with these recent declines, we’re only back to early July levels, indicating that the markets have been performing strongly overall.

Chad reminds us that market corrections are a normal part of the economic cycle. Since 1958, there have been 51 pullbacks of 10% or more. This recent correction was triggered by several factors:

• Underwhelming AI performance
• Weak US job data
• The Bank of Japan raising rates
• Lackluster earnings from big tech companies
• Concerns about increased tech regulation

The Importance of Time in the Market

One of the key messages Chad emphasizes is the importance of time in the market rather than trying to time the market. While recent investments may not look fantastic in the short term, it’s crucial to maintain a long-term perspective. As Chad puts it, “Time in the market far exceeds timing the market.”

Market Themes and Rotations

Despite the recent volatility, certain market themes remain consistent:

• The “Magnificent 7” tech stocks have been driving market rallies
• There’s been a rotation from S&P market weight to a more equal weight strategy
• The Dow has shown resilience while tech-heavy indices like the Nasdaq have struggled

Chad notes that they’ve reduced exposure to the S&P market weight in favor of a more equal-weight approach to capture broader market breadth. This strategy has proven effective, with less drawdown than broader indices during the recent correction.

Economic Indicators and Concerns

Several economic factors are contributing to market uncertainty:

• Potential recession concerns as US unemployment rose above 4.3% in July
• Rotation out of big tech stocks by institutional investors
• Warren Buffett reducing his stake in Apple
• Fears of a consumer-led recession in the US

However, Chad cautions against making decisions based solely on headlines, emphasizing the importance of deeper analysis.

Interest Rates and Federal Reserve Policy

The market has been anticipating interest rate cuts, but the Federal Reserve has taken a more cautious approach. Chad discusses the “higher for longer” trade, which typically bodes well for the market in the long run. Current trading probabilities suggest:

• A 50 basis point cut in September
• Another 50 basis point cut in October
• Potential 25 basis point cuts thereafter

Oil Markets and Global Economic Outlook

Chad touches on the oil markets, noting that short-term fears of weaker demand are impacting prices. However, he remains fundamentally aligned with the view that long-term supply and demand dynamics for finite resources will create a tight oil supply.

Looking ahead, Chad is optimistic about a synchronized global economic recovery into 2025, driven by factors such as:

• Historic amounts of cash on the sidelines
• AI-driven profitability gains across various sectors
• Increased economic activity and earnings per share growth

Portfolio Management and Investor Psychology

A crucial aspect of Chad’s approach is managing not just investments, but also investor expectations and emotions. He emphasizes that “how you feel about your investments is equally as important as what you’re invested in.” This philosophy helps create resilience during periods of volatility.

Key elements of their portfolio management strategy include:

• Broad market diversification
• Inclusion of alternatives and fixed income
• Maintaining ample liquidity to take advantage of opportunities
• Tactical adjustments based on market conditions

Looking Ahead: Volatility and Opportunities

As we approach the US election cycle, Chad anticipates increased market volatility. However, he remains constructive on the overall market outlook. He likens market turbulence to airplane turbulence, emphasizing that it’s a normal part of the journey and that their strategies are built to withstand such conditions.

Chad and his team remain committed to:

• Staying nimble and tactical in their approach
• Identifying and capitalizing on emerging opportunities
• Maintaining open communication with clients
• Continuously refining their investment processes and strategies

In conclusion, while market corrections can be unsettling, they are a normal part of the economic cycle. By maintaining a long-term perspective, diversifying portfolios, and staying attuned to market rotations and economic indicators, investors can navigate these periods of volatility and position themselves for long-term success.