The financial markets got an early Christmas present from the Fed yesterday. For the first time, the Fed officially acknowledged that the economy and inflation are slowing and that it may become appropriate for them to begin lowering interest rates. The Fed is now anticipating three interest rate cuts in 2024. This was music to the markets’ ears, with the Dow Jones Industrial Average breaking 37,000 and hitting a new all-time high.
Bonds also rallied sharply on the news, with prices rising as yields fell due to the inverse relationship between bond prices and yields. Both stocks and bonds are continuing to rise today. The incredible rally we have seen in stocks over the past 1½ months has been especially encouraging due to the broad participation in stocks. Most of this year’s positive performance in U.S. stocks was previously confined to just seven large technology companies. Now, stocks both large and small have hopped on the band wagon, improving the odds of a sustainable rally.
In my last quarterly update, I commented that bond yields were the most attractive they had been since 2007. I considered whether or not to increase our clients’ allocation to bonds; however, I felt the bounce potential was even greater in stocks than bonds with inflation falling and the prospect of lower interest rates next year. While the rally in bonds these past 1½ months has also been incredible, the rally in stocks has been even greater. We did increase our clients’ exposure to bonds in our broadly diversified, managed account program accounts in that we shifted some of our holdings in very short-term securities to longer term.
All of us here at GSR Capital Management wish you a joyous holiday season.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President