As summer winds down and we trade our beach towels for schoolbooks, both Wall Street and investors are getting back to business. This time of year traditionally marks a return to market activity, and after a year of rallies, we’re beginning to see a bit of a reality check, especially as some of the high-fliers take a pause.
Investors are now closely watching the Federal Reserve, anticipating potential interest rate cuts later this month following their historic battle with inflation. Despite some bumps in early August, the major U.S. stock indexes are still hovering near their highs—a reminder that markets can be as unpredictable as the weather.
Interestingly, since the 1930s, the S&P 500 has typically experienced a 10% or more drop at least once a year, according to Bank of America. So far, we’ve managed to dodge that bullet this year, but it’s always wise to stay prepared.
This year’s market ascent has been led by the “Magnificent Seven,” but recently, the rally has broadened. Investors have started rotating into areas that had lagged behind, like smaller company shares. The Russell 2000 index and the S&P 500 Equal Weight index, which treat companies of all sizes equally, have outperformed the S&P 500 since midyear. It’s like a party where everyone is finally getting a turn on the dance floor!
However, we shouldn’t overlook those who arrived late to the AI party, eagerly buying into high-flying stocks without careful consideration. Chasing returns without critical thinking can be risky. Over the last year, the market has favored those who went all-in on the biggest stocks, leaving more disciplined, diversified investors feeling a bit overlooked. Nvidia, for example, has become a giant, making up more than 6% of the S&P 500. While it’s a fantastic company, it might be time to consider its future price appreciation potential when a stock becomes that expensive.
As always, the key is staying disciplined, evaluating valuations, and not getting swept up in the hype. If something seems too good to be true, it probably is. Our goal is to identify stocks with attractive valuations that we believe offer better returns and lower risk over the long run. We stick to the facts, use data and history to inform our views and make careful decisions on when to buy or sell based on verifiable metrics. This approach helps us maintain a balanced perspective and resist the urge to make impulsive decisions driven by recent trends or speculative behavior.
Our studied approach was recently recognized with a 6-Star Top Guns award from Informa for our U.S. Balanced Portfolio. This award honors portfolios that consistently demonstrate strong risk-adjusted returns over various periods, including 1-year, 3-year, and 5-year time frames. The U.S. Balanced Portfolio aims for long-term capital appreciation by strategically allocating investments across U.S. large-cap equities, high-quality bonds, and cash. We take pride in this recognition, as it highlights the consistency of our investment approach over the long term.
As we head into fall, remember that markets don’t always make sense, and trying to chase returns or avoid selloffs can lead to poor investment choices. Stay focused on maintaining your strategy and avoiding the hype or panic that markets and pundits often provoke.
We are grateful for your continued support and confidence in Cardinal Capital. We welcome the opportunity to connect for a personalized portfolio review at your convenience. Thank you for entrusting us with your financial success.
