I'm just checking in to give you some perspective on where we stand.  In general, the knee-jerk reaction when dealing with uncertainty is to sell and wait for a resolution.  As I mentioned in the prior note, the level of uncertainty has picked up over the past couple of months.

The question hanging over the stock market was, "Interest rates are elevated.  How long before we can have confidence rates will head lower?" The July inflation report, in which prices rose less than expected, seems to have answered this question for investors.

Since the stock market bottomed in October 2022, there has been a clear divide in performance between the small number of stocks immune from interest rates and those that didn't have that luxury.   That has changed since the inflation report was released on July 11, as seen in the charts below. 

The S&P 500's performance had been driven by a handful of stocks that didn't have to worry as much about the level of interest rates.  The average stock in the S&P 500, represented by the equally weighted index and parts of the stock market most sensitive to interest rates, represented by the Russell 2000, had a fire lit under them in July.  We've been waiting for more stocks to participate in the gains, and seeing this potential for broader market participation is promising.

I think a couple of concerns drive the recent volatility.  First is the upcoming election.  No one knows the outcome, but we will in a couple of months, which should relieve investors.  Until then, we can expect this to add volatility.  I suggest not letting your thoughts about the election weigh too much on your portfolio decisions.

The more significant question for investors is why inflation is coming down faster than expected.  One explanation is that two years of higher interest rates have finally taken their toll, and a recession might be on the horizon.  Until recently, the expectation was optimistic; interest rates would come down because we tamed inflation without pain.  Historically, the reason behind rate cuts matters, as you can see in this chart.  If the Fed is lowering rates in response to a recession, the S&P does not fare well.

I think we are on the path to returning to a prudent stock allocation for those who have not yet done so.  However, until we see the market gain clarity on the recession question, we should keep some dry powder in your portfolio by maintaining an overweight to bonds. 

Tomorrow is the monthly jobs report, which will give investors a clue about where we are headed.  Last month, the number of jobs added was less than the prior month but also lower than expectations.  The market fell because this ran counter to the rosy narrative. 

I've contacted most of you over the past couple of months.  If we made changes to your portfolio, I maintain confidence in my recommendations.  Each day, we get a peak around the corner, whether the market is up or down.  When I know more, we'll adjust as it makes sense for you.

 One way to get ahead of anything catching us off guard is to stay ahead of any potential cash needs.  If you have any substantial expenses on the horizon, please keep me in mind.  It is always easier to raise cash when we choose to, not when we need to.