The Objective Advisor

The first half of the year was a challenging environment for a lot of fixed income markets, especially higher-quality markets. With the Federal Reserve (Fed) seemingly unlikely to lower interest rates until after the summer months (at the earliest), the “higher for longer” narrative has kept a lid on any sort of bond market rally. While falling interest rates help provide price appreciation in this higher-for-longer environment, fixed income investors are likely better served by focusing on income opportunities, which has been the traditional goal of fixed income investors. Investors can best navigate the latecycle economic environment by adding high-quality bonds, offering attractive risk-adjusted returns, and lowering overall portfolio volatility. Consider moving away from cash, with the Fed likely to cut rates in the second half.

Key Themes for the Second Half

Sharp shifts in interest rate expectations have been a hallmark of the bond market over the last few years, but with volatility comes opportunity, and investors should consider:

• Current Bond Yield Levels Offer Opportunity: Treasury yields are near their highest levels in decades, making fixed income an attractive asset class again. Investors can build diversified portfolios with high-quality bonds offering attractive returns.
• Focus on Income: With rate cuts likely, a focus on income generation becomes more important for fixed income investors than price appreciation. Consider fixed income over cash.
• Don't Expect Big Moves in Longer-Term Yields: An inverted yield curve suggests limited potential for significant declines in longer-term bond yields.
• Mind the Gap: Fixed income volatility in the first half was characterized by changing rate cut expectations. Second half volatility will likely be due to changing expectations on the depth of rate-cuts expected in the rate-cutting cycle. Currently, there is a gap between market expectations and Fed communication.
• Election Volatility/Noise: As we get closer to Election Day, economic policy uncertainty will likely pick up as each political party jockeys for votes. High economic uncertainty has historically been constructive for core bonds, (as explained in “Election Anxiety? Could Bonds Calm Your Fears?”) but high expected budget deficits could keep interest rates elevated.

Every year as the summer months draw near their end, LPL Financial hosts its annual conference for financial advisors. While the conference is an excellent opportunity for advisors to expand upon professional interests, discover ways to enhance their impact on clients, and connect with industry experts — learning is a two-way street. At this year’s big event with nearly 9,000 attendees in sunny San Diego, the LPL Research team had the unique opportunity to connect with many of these advisors in person to get their perspectives on the capital markets. Below are some of the frequently asked questions from the road.

Equity Discussions

The VIX spike and subsequent collapse. After a historic 65 reading on the CBOE Volatility Index (VIX), a measure of implied volatility for the S&P 500, just a week before the conference, combined with an upcoming presidential election, we would have expected more jittery advisors. However, we noted just the opposite. In fact, far fewer discussions than expected were around the recent spike in the VIX and the election, reflecting the quick return to calm by the VIX, which is well below its long-term average of 19–20, and down a remarkable 50 points in two weeks. Commonly referred to as the “fear gauge,” a rising VIX is associated with increased fear and uncertainty in the marketplace and falling stock prices, and vice versa for a declining VIX. An underwhelming July employment report and the unwinding of the yen carry trade created a storm of volatility earlier this month (more on the carry trade below). The VIX jumped to as high as 65.73 on August 5, marking its highest intraday reading since March 2020. Fear has dissipated and stocks have subsequently rebounded as economic data improved and currency markets stabilized. Technically, the VIX has pulled back through the April highs and appears poised to retest support near its 200-day moving average (dma). A break below this level would add to the evidence of the market shifting back toward a risk-on backdrop.

Of course, last week’s headliner was Jerome Powell and the Federal Reserve (Fed) cutting rates by a half percent on Wednesday, September 18, the first time since the COVID-19 pandemic broke out in 2020. The Fed “pause” ended at 423 days and now stands as the second-longest on record, while the 26% gain for the S&P 500 during the pause (7/27/23–9/18/24) ranks first. Here we share some thoughts on the Fed’s move last week and some potential market implications of not only Fed policy but also fiscal policy post-election.

It's Not How You Drive, It’s How You Arrive

Golfers may appreciate this mantra as representing the importance of the final putt that goes in the hole as being the most important thing, more so than a well-struck first shot off the tee. We think this analogy works for the Fed here. While the 0.25% vs. 0.50% debate was all the rage, what matters most is how much Powell and company cut for the entire cycle and how lower rates affect the economy. Whether the cycle starts with a quarter or half-point cut isn’t as important given the Fed will almost certainly have to cut much more than that this cycle. (For those who appreciate NASCAR more than golf, call it a pit stop on the way to the more important finish line.)

We don’t know how much the Fed will end up cutting, but if they are able to engineer a soft landing — and last week’s rally sure suggests the market thinks that’s what we’ll get — then perhaps they end up stopping before they get to 3% (the upper bound now sits at 5%, down from 5.5%). The Fed and most analysts think the neutral rate is around 3%, or potentially a bit higher. Either way, based on the 1995 experience, that sets up a favorable environment for stock investors. After the initial cut in July 1995, the S&P 500 rallied 18.7% over the next 12 months.

When it comes to investing, gold may be the antithesis of artificial intelligence (AI). The precious metal has acted as a store of value for thousands of years with zero technological innovation — gold is discovered, not developed. Gold is also a real tangible asset and can act as a potential hedge against inflation or a safe haven during times of crisis. Given these properties and the backdrop of a risk-on-record-setting equity market, many investors are wondering what’s behind the paradoxical price action of gold’s rally to new highs and how the yellow metal has matched the momentum in AI stocks over the last several months (gold and the equal-weight Magnificent Seven Index are both up around 20% since March). Herein we discuss the key drivers of gold and why this rally is no flash in the pan.

Melt Up in Gold

After consolidating sideways for several years, spot gold prices finally reached record highs in March. The rally continued into the summer months as expectations for a monetary policy pivot from the Federal Reserve (Fed) firmed. Interest rates and the dollar subsequently declined as the market began to price in higher probabilities for rate cuts. This was an expected response from gold, as lower U.S. interest rates and a weaker dollar increased the appeal of non-yielding bullion.

Perhaps more surprising is the lack of demand for gold exchange-traded funds (ETFs). Until recently, ETF holdings of gold had inexplicably decoupled from the precious metal over the last two years. However, with gold breaking out to new highs and creating a lot of headlines along the way, fear of missing out appears to be kicking in. Buyers have returned to chase this rally as gold ETF holdings recently reported seven straight weeks of positive inflows, marking the longest inflow streak since March 2022. History suggests this trend could continue as peaks in gold ETF holdings tend to occur after peaks in gold prices.

Stocks have done so well this year that it’s fair to say market participants haven’t feared much. But just because risks haven’t affected markets lately doesn’t mean they won’t in the future. In that “spirit,” as Halloween approaches, we discuss what scares us about the economy and financial markets.

#1: Stalwart Upper-Income Consumers Are Starting to Feel Some Pressure

For U.S. consumers, it’s the best of times and the worst of times. It’s no surprise that upper-income households supported consumer spending in recent periods. And it’s also no surprise that firms like credit card lender Capital One (COF) want to focus on the wealthier consumer, knowing those consumers weather downturns better.

When people talk about a “resilient consumer,” what they are really talking about is upper-income households. To borrow from Charles Dickens, the current macro landscape is the best of times and simultaneously the worst of times.

So, it behooves investors to carefully track the health of wealthier consumers, and they just got a troubling update from the New York Federal Reserve (Fed). What scares us this Halloween season is the potential stress on the wealthier cohort as more upper-income households reported they will most likely be unable to make their minimum debt payment — now at the highest percentage since mid-2014 when the economy was feeling the aftereffects of the Global Financial Crisis.

The imposition of tariffs by the United States this week has understandably sparked volatility in the markets.

It's in the face of such challenges that our diversified, strategically balanced, long-term approach demonstrate their true value. Our goal has always been to withstand market ups and downs, minimizing exposure to individual market events and maximizing potential returns through diversified investments across various asset classes.

One essential concept in navigating such circumstances is the importance of avoiding financial inertia. In prosperous times, this tendency may lead to missed opportunities for diversification or rebalancing. Conversely, during downturns, failing to act might result in unwisely holding onto underperforming assets or making reactive decisions driven by fear.

By emphasizing the importance of ongoing evaluation and dynamic adjustments to your portfolio, our proactive management involves regular reviews and strategic shifts to align with current market conditions, helping to avoid these pitfalls.

While market reactions to tariffs may introduce short-term volatility, maintaining focus on your long-term financial goals remains paramount. Rest assured, I am closely monitoring these developments and am prepared to implement strategic adjustments as necessary to better position your portfolio's performance.

For decades, U.S. Treasury bonds were regarded as among the safest of investments—so reliable, in fact, that they came to be viewed as the foundation of the global financial system.

But today we are facing an environment where those old assumptions may no longer hold true. With U.S. debt growing at an accelerating pace, confidence in Treasuries is being tested in ways we have not seen for generations. What was once considered unquestionably secure is now subject to doubt, challenging the traditional idea that there are permanent “safe havens” in investing.

This shift carries a powerful reminder: the past cannot always serve as a dependable guide to the future. The strategies that felt comfortable for decades may no longer provide the same level of protection or opportunity.

That is why professional guidance is more important than ever. My role as your advisor is to help you navigate these changes with clear-eyed analysis and strategies based not only on legacy assumptions, but on today’s realities—and tomorrow’s challenges. By reassessing risks, identifying new opportunities, and adjusting portfolios with discipline and foresight, we can strive to preserve and grow your wealth even in uncertain times.

If you’d like to discuss how these shifting dynamics could affect you, please don’t hesitate to reach out. It is exactly during periods like this that a thoughtful, flexible approach makes all the difference.