Atticus Wealth Management

THE VIEW FROM THE TOP

Market Commentary from Atticus Wealth Management
May 2024 – 2nd Quarter

Navigating Market Jitters Moving in Summer

The recent turbulence in the stock market, marked by the S&P 500’s first 5% pullback of the year, has prompted concerns over various factors including potential delays in Fed rate cuts, declines in technology and artificial intelligence stocks, and geopolitical tensions in the Middle East. During times of heightened market stress, it’s imperative for investors to maintain a
balanced perspective and refrain from reactionary decision-making based solely on headlines.

As we monitor these geopolitical developments, it’s also crucial to recognize their potential implications for the global economy, markets, and investment portfolios. While geopolitical events can trigger market fluctuations, historical evidence suggests that their impact trends to be transitory, with markets typically rebounding once the situation stabilizes.

1 Geopolitical Disruptions

Geopolitical developments often trigger concern among investors as they deviate from the usual flow of business and market news. Analyzing these events poses a challenge due to their complexity, relying on the actions of individuals and groups with intricate histories and motivations.

Nevertheless, historical data reveals that while geopolitics may momentarily impact markets, their effects are typically transient. A comparison of market returns following significant geopolitical events this century, illustrated in the accompanying chart, supports this notion. While events like 9/11 reshaped the global landscape with enduring consequences, others, like the war in Ukraine, led to temporary disruptions such as heightened oil prices affecting inflation and monetary policy. However, once stability was restored, most events failed to leave a lasting imprint on markets.

Therefore, amidst current conflicts, investors are advised against making hasty judgments regarding their portfolios. Over the long term, markets tend to rebound and thrive, primarily driven by broader business cycles spanning years and decades. It’s crucial to maintain perspective, recognizing that while geopolitical turmoil may cause short-term fluctuations, steadfastness and focus on long-term objectives typically yield favorable outcomes.

2 Stubborn Inflation

Although Atticus’ Investment Committee has always believed the last mile in the inflation battle would be the most difficult, inflation indicators have demonstrated a resilience surpassing most economists’ expectations. In the latest Consumer Price Index (CPI) report for March, headline inflation persisted higher than forecasted at 3.5% year-over-year, while core inflation, excluding food and energy prices, surged to 3.8%. The escalation in shelter costs, encompassing rental and homeownership expenses, stands out as a significant factor impeding the cooling of inflationary pressures.

In conjunction with unexpectedly robust data from the job market, a growing number of investors are revising their outlook regarding Federal Reserve rate cuts for the year, anticipating a slower pace or no cuts at all. While the Fed’s economic projections initially hinted at the possibility of three rate cuts this year, market sentiment has drastically shifted from earlier anticipations of rate cuts as early as March. Presently, market consensus leans towards expecting only 2 or 3 rate cuts in 2024.

Amidst these evolving expectations, it remains imperative for investors to maintain a balanced perspective. Long-term investment success hinges not solely on the precise timing or magnitude of rate adjustments, but rather on the broader policy direction. Despite lingering uncertainties surrounding the Fed’s projections and monthly inflation figures, including the potential escalation of oil prices amid geopolitical tensions, the current inflationary landscape is deemed more manageable. Consequently, an emergency monetary response is deemed unnecessary, underscoring the importance of maintaining a
strategic approach grounded in long-term financial objectives.

3 Market Volatility

Contextualizing market volatility is essential for investors. Although the recent decline marks the most substantial setback since the year commenced, it’s crucial to juxtapose this against the backdrop of a robust total return in the first quarter.

Accompanying data illustrates that market fluctuations are a regular feature, with this year’s pullbacks appearing relatively modest in comparison. Despite these transient challenges, markets have historically demonstrated resilience, often concluding on positive trajectories. Hence, the strategic inclusion of a diversified portfolio can serve as a shield against short-term risks,
enhancing the prospects of long-term financial success. This remains pertinent regardless of the underlying causes of market volatility, be it economic conditions, Federal Reserve actions, geopolitical tensions, or other contributing factors.

4 The Bottom Line

The onset of the second quarter has witnessed a tumultuous phase in the markets, primarily influenced by evolving anticipations regarding Federal Reserve policies and a noticeable uptick in geopolitical tensions. Investors have encountered a
landscape marked by heightened uncertainty, spurred by nuanced shifts in the Fed’s stance and escalating geopolitical frictions.

Amidst these challenges, maintaining composure and maintaining a holistic perspective on unfolding events remain paramount strategies for safeguarding long-term financial objectives. By adopting a measured approach and refraining from reactionary responses, investors can navigate through turbulent market conditions with resilience, ultimately fortifying their pathways to enduring financial success.

5 Looking Ahead

Atticus’ latest analysis of the stock market presents a nuanced view characterized by mixed signals. In the short term, there’s a quest for stability amidst a minor corrective decline occurring within a broader uptrend. Recent market rebounds are viewed as
standard reactions to support levels being tested, but there’s a looming concern of a deeper downturn, especially as the market enters the historically weaker summer season for stocks.

Looking at the intermediate term, historical data reflecting overextension and bearish seasonal trends suggest susceptibility to further market downturns. However, Atticus sees this as an opportunity to capitalize on lower equity prices. Despite this vulnerability, it’s worth noting that the market could absorb a further decline of over 7% without disrupting the prevailing uptrend.

Strategically, Atticus adopts a balanced, neutral to slightly defensive stance. While there’s recognition of potential market challenges, there’s no anticipation of significant corrective declines on the immediate horizon. However, this outlook is contingent on existing conditions remaining relatively stable.