Rockbridge Institutional – August 2024 Market Review

Market Review

Stocks

In August, a globally diversified portfolio fell 5.6% in the first five days only to snap back to earning nearly 2% by month end. Domestic small cap stocks (Russell 2000) were down 1% in the month, giving back much of their July results. Other stock indices, however, ended up between 2% and 3%. These results confirm that “do nothing” was the best response to the unexplained falloff at the beginning of the month.

So far this year, stocks have rewarded investors, earning returns that range from 10% for the MSCI emerging markets index to 19% for the Tech-ladened S&P 500. These numbers clearly demonstrate “exuberance.”  However, with falling interest rates, reduced inflation, a “soft landing,” plus the prospects for AI, a case can be made that they may not be “irrational.” The trailing 12 months have been equally good for stocks with returns ranging from 15%-30%.

While the recent past has been good for stocks, there is plenty of uncertainty about what lies ahead.  Consequently, we should be cautious about extrapolating recent results very far into the future.

Bonds

In August, yields fell 0.4%, and between 0.5% and 0.7% since June 30, for bonds maturing beyond a year, reflecting an anticipated cut in the Federal Funds rate. It is widely expected that the Fed will reduce this rate at their September meeting. Bond prices move inversely with yields; consequently, bonds earned between 2% and 4% quarter-to-date depending on maturity (longer term up more).

Recent periods have been good for investors (a 60/40 stock/bond portfolio earned 16% over the trailing 12 months); yet, it continues to be appropriate to avoid making predictions while maintaining established commitments to well-diversified portfolios sufficient to span capital markets.

Dealing with Stock Price Volatility

This past month’s results, as well as the first days of September, confirm once again that stock markets are volatile. What explains changes in stock values is continuous receipt of information as well as simple noise, which means future returns are random and unpredictable.

Theoretically, the observed stock price is when traders decide to sell to traders who decide to buy. It’s information about an uncertain future that drives these decisions and, consequently, stock prices. As new information becomes available prices change. Since there is no pattern in the receipt of new information there is no predictable pattern in stock prices. Contributing further to this unpredictability are changes that can’t be explained by new information – “noise.” The falloff in early August fits the noise category.

However, if we are willing to accept that market response to uncertain events is consistent through time, then history provides a means to objectively describe an unknown future. While not a prediction, the past pattern of stock returns provides a reasonable distribution of future prices. This distribution provides an expected payoff, and a range of possible outcomes from which we can calculate a probability, which is perhaps the best we have for dealing with an unknown future.