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JUST A FEW THOUGHTS ON A WEDNESDAY!

Today is the start of our annual two-day Knights of Columbus Asset Advisors Investor Symposium. We provide an educational and, hopefully, thought-provoking seminar over two days with KoCAA investment professionals as well as external speakers. It is typically a fun and informative session and also provides time for fellowship with our clients, the investment consultant community, and those who haven’t become clients…yet!

In reviewing my morning research, I read a report on style factors that was produced by Wilshire Indexes. I don’t think this is much of a surprise, but momentum was the most important factor and generated a return of 24.5% during the first half of 2024. Large Cap was also an important factor with a return of 15.1%, with Large Cap Growth returning 22.7% versus Large Cap Value with a return of 12.1%. There are other firms that produce factor returns, all using slightly different methodologies, but they are generally directionally similar.

I was reviewing these style factors in light of the continued rally in stocks. For many who are concerned they missed out on the big run in growth and momentum stocks, they may question if now is the time to jump in. This brings me to my second thought of the morning: The Fed.

Fed Chairman Jerome Powell is in the middle of two days of testimony on Capitol Hill. Our elected leaders poked and prodded him to find out just when the Fed is going to cut interest rates. If there were any questions left in the minds of market observers, Powell delivered the message that he was not telegraphing the timing of the Fed’s next move. Further, he doubled down on his data-driven focus and that he and the other members of the Federal Reserve would act when the data revealed that it was time to do so.

Another aspect of the testimony yesterday was a reiteration, of sorts, of the Fed’s dual mandate to control inflation while also focusing on maintaining full employment. The unemployment rate has ticked up to 4.1% and this is the highest level since 2021[1]. In and of itself, many wonder if rising unemployment will be enough of an impetus for Powell to start cutting rates to spur employment. However, cutting rates to spur spending and employment will cut directly against the focus on tempering inflation. I am not sure if the testimony we hear today will provide greater insight, but I continue to believe that the Fed will err on the side of quelling inflation over keeping unemployment low. To keep unemployment low through monetary policy will only add to inflationary pressures.

Dating back to the “Greenspan Put,” many investors have become somewhat complacent in their belief that the Fed will ride to the rescue. I think the Fed is being thoughtful and deliberate, and these are very good things. I also think that the transition to lower inflation will not be a smooth road. Stay tuned!

[1] Source: Bloomberg

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