September 21, 2024 Market Update

The Federal Reserve cut interest rates this past Wednesday for the first time since March 2020, when it aggressively reduced rates to nearly zero in response to the economic turmoil caused by the COVID-19 pandemic.  This half-point cut suggests the Fed is concerned about the state of the job market, which has shown signs of cooling in recent months.  The benchmark rate now sits between 4.75% and 5%.

The decision propelled the markets higher, helping the S&P 500 Index and the Dow Jones to post all-time highs this week.  The most notable gain, however, was posted by the Russell 2000 Index, a proxy for the small-cap stocks, surging 2% over this past week.

The trend in the bond market was less pronounced and somewhat unexpected, where the 10-year treasury yield rose by 8 bps, signaling some anticipation in investors’ minds about lingering inflation following the dovish rate cut.  The bond market, as measured by the Vanguard Total Bond Market ETF (BND) was down 0.19% to close the week.

Ahead of the Federal Reserve’s announcement, The Milwaukee Company implemented a risk management strategy referred to as a “collar” in some of our client portfolios.  A collar allows us to retain existing stock positions while using put options to limit downside risk and call options to help offset the cost of that protection.  The result is a strategy that guards the portfolio from significant losses while allowing for some upside, although it does cap the potential gains.  You can learn more about put and call options here.

One of the key benefits of a collar is that it allows us to hedge against downside risk without selling any stock positions, which means a collar does not trigger capital gains taxes.  This makes the strategy particularly well-suited for taxable, non-retirement accounts.

Several considerations led to the decision to establish collars in certain client accounts.  These include ongoing uncertainty about the Fed's shift toward quantitative loosening and its impact on the economy, growing political instability both domestically and internationally, high stock valuations, and the resulting overweight in equities within some of our client portfolios.  (The extent of the equity overweight for any given client depends on the particular combination of systematic strategies we use to manage their account.) 

We view collars as a short-term, tactical measure to help safeguard portfolios that currently hold a higher-than-usual equity allocation during periods of heightened uncertainty.  As always, we will continue to monitor market developments closely and adjust our strategies as necessary to stay aligned with your long-term financial goals.

If you have any questions or concerns, please don’t hesitate to reach out.

That’s all for now.  Have a great weekend and invest wisely my friends.