Q4 2024 Market Intel Report | Alison Wealth Management

With a strong but volatile push into the fourth quarter of 2024, the stock market has delivered great results to investors who have stayed disciplined. 

In this video, we will discuss the 3 key themes on the minds of investors as we enter into the fourth quarter of 2024. We will discuss:

✅ What could the start of the Fed rate cutting cycle mean for investors? 
The Federal Reserve kicked off its highly anticipated rate cutting cycle with a 50-basis point reduction in September 2024. History shows cash yields decline rapidly following the start of cutting cycles, falling by 2% on average just twelve months later. U.S. stocks have delivered a positive return of 7.2% one year after the initial cut, though depending on whether the economy avoids a recession or not within that year has led to starkly different results (+19.6% vs. –2.7%). 

✅ How have markets performed in the months surrounding presidential elections? 
Based on trends, we shouldn’t be surprised if we see an increase in volatility leading up to the U.S. presidential election. That said, history shows that it may be temporary, as markets tend to calm rather quickly once the results are in. A similar trend can be seen in stock prices, which on average have been choppy beginning in September and lasting into November of election years. However, after Americans go to the polls, investors who stayed the course have historically been rewarded with strong gains, both in the short- and long-term.  

✅ Why should investors think of market volatility as an opportunity? 
Volatility is a feature of investing, not a defect. However, many investors instinctually view it as something to fear and avoid, which can lead to poor behavior and subpar long-term results. Investors could benefit from thinking of the VIX as an “opportunity index.” Because while it’s always a good time to invest, history shows that some of the best opportunities have come during periods associated with elevated volatility. 

🖥 Looking for an advisor who truly understands financial planning, investments, taxes, protection planning, and legacy planning? Visit our website https://alisonwealth.com  

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Episode Transcript

Speaker 0 (00:06):
Hey everyone, this is Dave Allison, founder and CEO
of Allison Wealth Management,and I want to welcome you to our
fourth quarter 2024 marketintel report.
The third quarter was certainlyfilled with volatility around
the upcoming presidentialelection, geopolitical events
and the Federal Reserve'smonetary policy return, the Dow

(00:30):
Jones Industrial Average leadingthe way at over 8% and the
tech-heavy NASDAQ indexreturning almost 3%.

(00:53):
Those on top of a hot start tothe first part of the year have
led to good calendar yearreturns so far, with both the
NASDAQ and the S&P 500 up almost20% year to date.
Of course, all of this in lightof uncertainty around the
presidential election, of course, as I mentioned earlier,

(01:15):
geopolitical risks and theFederal Reserve's rate cutting
cycle.
That is just beginning, and so,in this video, we're going to
talk about the three key themeson the minds of investors today,
those being what could thestart of this Federal Reserve
interest rate cutting cycle meanfor investors?

(01:35):
How have markets performed inmonths surrounding a
presidential election?
And then, last but not least,why should investors think about
market volatility as anopportunity?
So let's go ahead and diveright in.
The first theme that I want totalk about is what could the
start of the Fed rate cuttingcycle mean for investors?

(01:59):
As we know, in September theFederal Reserve kicked off its
highly anticipated rate cuttingcycle with a 50 basis point
reduction.
Now what we typically see is,when the Federal Reserve starts
to cut interest rates, cashyields which is the amount of
interest that you make onholding cash start to fall

(02:22):
quickly.
In fact, history shows us thatcash yields decline rapidly
following the start of a cuttingcycle, falling by 2% on average
just 12 months later.
Now the significance of this isthere is a historic amount of
cash still sitting on thesidelines.

(02:45):
Many of those investors werehappy earning their 4% or 5%
interest rate on cash.
Now, in hindsight, had thatmoney been invested in the
market?
As I just shared with youearlier, equity markets are up
20% year to date.
Of course, more diversifiedportfolios are up somewhere

(03:06):
between probably 5% and 20%,depending on the asset class,
and so Cash certainly didn'toutperform the markets so far in
2024, but it's been a nice safehaven for liquid money that you
don't want at risk, meaningfulyield, and that could be a boon
to equity markets.

(03:27):
If some of that five plustrillion dollars of cash sitting
on the sidelines starts gettingdeployed to things like the
stock market.
It could accelerate themomentum and price activity of

(03:48):
stocks in general.
Some of the interesting datapoints on what the market has
done when the Federal Reservestarts cutting interest rates
could be a telling sign forwhat's ahead.
Now, as we all know, history isno guarantee of what will happen
into the future.
But if we look at the averagestock return 12 months after the

(04:12):
Federal Reserve has started tocut interest rates, we've seen
that going back all the waysince 1974, the market has
produced an average return ofabout 7.2% the 12 months after
the first interest rate cut.
Now, depending on whether theeconomy avoids a recession or

(04:34):
not within the year, has led tostarkly different returns.
If we look at time periodswhere the Federal Reserve starts
to cut interest rates but weare not in a recession, nor do
we go into a recession in thefollowing 12 months, the stock
market has produced a 19.6%average return.

(04:57):
Well, contrast that to a timeperiod where the Federal Reserve
begins to cut interest ratesbecause we're in a recession or
we're going into a recession,and 12 months later the stock
market produced a return ofnegative 2.7%.
So average return of about 7.2in times where we're not going

(05:18):
into a recession really bullishreturns on the stock market.
But in times where the Fed iscutting interest rates because
we are going into a recession orhave a lot of economic
uncertainty, negative returnsfor stocks over the following 12
months.
But it's really important as along-term investor to zoom out
because three years or fiveyears later, if you look at that

(05:42):
blue line, the average marketreturn three years after the
Federal Reserve has started tocut interest rates is 41% and a
five year cumulative return ofover 77%, even if we are heading
into a recession or we'realready in a recession.

(06:03):
Three years after that firstcut positive 18% return.
Five years after, we want tomake sure we're maintaining a
longer-term perspective with ourinvestment strategy.
If you have short-term moneymoney that you may need or will

(06:23):
need sooner rather than later,money for income in retirement
over the next couple years, oryour emergency fund cash might
be a great asset class to keepthat in.
But if you want to maximize thegrowth in the return of your
money and you have the righttime horizon, now could be a
good time to continue to staythe course with your longer term

(06:45):
strategic asset allocation plan.
And the flip side is, as oftoday, the economy shows no
signs of an imminent recession,but, as we all know, this has
the potential to change.
The next thing I want to talkabout is the United States
presidential elections andhistorical patterns in market

(07:06):
volatility and returns.
You see, politics areincredibly important for
individuals, as we see why somepeople get quite passionate over
politics, but it's not reallyfor the stock market.
The stock market is anincredible information
processing machine that isprocessing all kinds of data

(07:27):
points on a company's ability toproduce future cash flow and
earnings.
Politics play into that.
Of course they do, but they'rejust one of many, many factors.
One thing that we have seen inhistorical patterns around
election years is that as welead into the November election
date, we see increasedvolatility in the stock market.

(07:50):
If you look at the chart thatI'm going to put up in the video
, the dark blue line representsthe average monthly volatility
in an election year, whereas theblue bar represents the average
monthly volatility in anon-election year.
You can clearly see that as weapproach election day September,

(08:11):
october, november we see a lotof heightened or increased
volatility in the stock market.
Once election day comes andgoes and the results are in, we
start to see that volatilitydissipate.
Similar trends can be seen instock prices, which, on average,

(08:32):
have been choppy beginning inSeptember and lasting into the
November election, butpost-election, through the end
of the year, we typically see arise in stock prices.
On average, an investment madeon November 1st of an election

(08:53):
year has rallied over 16% in thepreceding eight months after an
election, and it went on togain 11.6% over the next decade
on an annualized basis.
So if you're asking yourself isnow a good time to be in the

(09:13):
markets, or maybe you have somecash on the sidelines, as you
can see here, based onhistorical data, we've typically
seen an increase in stockprices after election day.
And the last theme I want totalk about is how periods of
elevated volatility may in factrepresent an opportunity for

(09:35):
investors.
You see, the VIX, which is thevolatility index, often referred
to as the fear gauge in thestock market, is a real-time
measure of expected near-termvolatility.
As you can see in some of thehistorical examples, during the
global pandemic, the VIX wasover 55.

(09:58):
Pandemic the VIX was over 55.
When the tech bubble burst in2002, it was between a range of
45 and 55.
When the markets reacted to9-11 in 2001, it was between 35
and 45.
Why this is important is thatvolatility is a feature of

(10:18):
investing, not a defect.
However, many investorsinstinctively view it as
something to fear and avoid.
When markets become volatile,people think they should cash
out or go to more risk-offassets, and that can actually
lead to subpar long performanceand results.

(10:39):
Using the daily closing priceof the VIX, an investment made
at any level had a solid averageone-year return of 9.7%.
However, an investment made ondays where the VIX was elevated
performed meaningfully better.
So the note here is thatinvestors could benefit from

(11:03):
thinking of the VIX as anopportunity index, because,
while it's always a good time toinvest, history actually shows
that some of the bestopportunities have come during
periods associated with elevatedvolatility.
If you look at time periodswhere the VIX was 55 or higher,

(11:24):
the following one year returnwas 31.7%.
If you look at times when itwas 45 to 55, the following one
year return of the S&P 500 wasalmost 33%.
So this just goes to show youthat behavior is one of the
things that can really helpensure that you meet your

(11:48):
long-term goals and objectiveswhen it comes to investment
performance.
It might seem counterintuitive.
It might make more sense tocash out when times get volatile
, but in fact, the oppositeproves true when we look at
these historical trends.
So if you have any questions atall, please don't hesitate,
reach out to your advisor.

(12:08):
They're here to help talk aboutyour portfolio construction and
ensure that your investmentsalign with your volatility
tolerance and put you in thebest place to achieve your goals
and objectives.
Thank you so much and we'll seeyou next quarter.