Look Out: Markets Often Fall in the Fall

Throughout the first three quarters of this year, investors have shown complacency as markets rallied despite both good and bad news. However, as we move into the final quarter, the investment landscape is set to become more challenging. Election politics are taking center stage, with partisanship growing increasingly divisive. Investor sentiment is under pressure, battered by the toxic rhetoric from both parties. The policy platforms of the presidential candidates are starkly different—one generally supportive of markets, the other potentially detrimental. Meanwhile, two ongoing wars abroad continue to fuel geopolitical uncertainty, casting a shadow over global markets.

The Federal Reserve is poised to ease pressure on consumers and the economy by cutting interest rates. They appear satisfied with having engineered a significant drop in inflation without triggering a recession. However, we remain cautious about the Fed’s assumptions regarding the economy’s strength, given that interest rate policy typically has a 12-18 month lag effect. The restrictive stance maintained throughout the first three quarters of 2024 has yet to fully impact the economy, which could pose risks to economic growth, corporate earnings, and market performance in the coming months.

With valuations of many mega-cap companies at extreme levels, we recommend focusing on stocks that offer higher dividend yields and strong value dynamics, particularly within the small and mid-cap sectors. These companies are likely to take the lead in the next market phase as the Fed cuts rates. Bonds also look attractive in a rate-cutting environment, suggesting a shift from equity overweights to secure current high yields, in line with a more conservative investment strategy. Prioritizing capital protection strategies that actively manage allocations to reduce risk will be crucial in limiting potential losses.

One of my preferred economists advises that it’s wise to let other investors chase the final 10-15% returns of a bull market. He also noted that when political policies shift toward wealth redistribution and higher taxes, it often signals the end of the bull market.