The
stock
market
has
taken
a
sudden
sharp
turn
lower
in
August
after
the
broad
rally
seemed
to
run
low
on
gas
in
July.
The
market’s
drop
appears
to
be
a
combination
of
weaker-than-expected
economic
fundamentals
–
specifically
the
July
jobs
report
–
and negative
technical
factors.
Considering
the
market
valuation
was
trading
above
a
composite
of
our
fair
value
estimate,
we
are
not
necessarily
surprised
to
see
this
selloff.
However,
while
selloffs
like
this
are
unusual,
they’re
not
uncommon
and
not
a
reason
to
panic.
As
long-term
investors,
we
view
market
dislocations
as
an
opportune
time
to
rebalance
out
of
overvalued
categories
and
sectors
and
rotate
into
undervalued
areas.
For
example,
in
our
third-quarter
market
outlook,
we
recommended:
“Long-term
investors
will
be
better
off
paring
down
positions
in
growth
and
core
stocks,
which
are
becoming
overextended,
and
reinvesting
those
proceeds
into
value
stocks,
which
trade
at
an
attractive
margin
of
safety.”
Looking
forward,
we
continue
to
see
the
best
portfolio
positioning
to
overweight
areas
that
trade
at
deep
discounts
to
their
intrinsic
valuations.
These
areas
include
value
stocks
and
small-cap
stocks,
as
well
as
undervalued
sectors
such
as
real
estate,
energy,
and
traditional
communications.
2024
vs.
2022
Outlooks:
What’s
Different
Today?
In
our August
2024
market
outlook,
we
noted
that
our
price/fair
value
metric
had
peaked
at
1.07
in
mid-July
(one
of
our
highest
readings
since
2010),
close
to
where
the
market
peaked
at
the
end
of
2021.
In
our
2022
market
outlook,
we
recommended
that
investors
underweight
equities,
as
the
market
would
contend
with
four
main
headwinds:
rising
inflation,
rising
interest
rates,
slowing
economic
growth,
and
the
Federal
Reserve
tightening
monetary
policy.
As
these
headwinds
played
out
in
2022,
the
equity
market
dropped
as
much
as
22%
before
bottoming
out
in
October.
However,
while
our
price/fair
value
metric
at
the
end
of
July
was
1.03,
representing
a
3%
premium
to
a
composite
of
our
valuations,
today
we
think
investors
should
remain
at
a
market-weight
position
in
their
portfolios.
The
situation
now
is
much
different
than
the
one
in
2022.
Of
those
four
factors,
three
are
currently
tailwinds
and
only
one
remains
a
headwind.
Inflation
Since
peaking
in
mid-2022,
inflation
has
been
on
a
steady
downward
trend,
and
our
US
Economics
teams
project
that
it
will
continue
to
moderate
this
year
and
drop
below
the
Fed’s
2%
target
in
2025.
Interest
Rates
Interest
rates
rose
from
1.50%
to
over
4.00%
in
2022,
but
we
now
forecast
that
long-term
interest
rates
are
on
a
multi-year
downward
trend.
We
project
the
10-year
US
Treasury
will
average
3.75%
in
2025,
3.00%
in
2026,
and
bottom
out
at
2.75%
in
2027.
Easing
Monetary
Policy
In
2022,
the
Fed
embarked
on
one
of
the
fastest
and
steepest
monetary
tightening
policies
since
the
1980s
to
defeat
inflation.
With
inflation
on
a
steady
downward
trend,
the
central
bank
can
take
its
foot
off
the
monetary
brake
and
begin
to
cut
interest
rates.
We
expect
the
Fed
to
cut
at
least
twice
this
year,
and
expect
the
federal
funds
rate
to
drop
to
a
3.00%-3.25%
range
by
the
end
of
2025.
Rate
of
Economic
Growth
Of
the
four
headwinds
in
2022,
only
the
slowing
economic
growth
rate
remains
so
in
the
second
half
of
2024.
While
the
recent
jobs
report
was
softer
than
expected,
our
US
Economics
teams
continue
to
expect
a
soft
landing
and
do
not
foresee
a
near-term
recession.
We
project
economic
growth
to
slow
through
the
end
of
this
year
and
stagnate
in
the
first
half
of
2025.
However,
by
the
second
half
of
next
year,
we
forecast
the
economy
will
pick
up
speed
as
the
impact
of
easing
monetary
policy
begins
to
flow
through
the
real
economy.
What’s
an
Investor
to
Do
Today?
Steady
as
she
goes.
With
the
broad
equity
market
trading
just
a
little
over
fair
value,
we
advocate
for
investors
to
position
themselves
at
a
market
weight
within
their
targeted
long-term
asset
allocations
between
equity
and
fixed
income.
With
the
rate
of
economic
growth
projected
to
slow
for
the
next
few
quarters,
stock
markets
could
become
increasingly
volatile
this
summer
and
pullbacks
could
provide
an
opportunity
to
move
back
to
overweight
equity
positions.
Within
equity,
we
still
see
the
best
valuation
in
the
value
category
and
small-cap
stocks.Undervalued
sectors
to
overweight
include
real
estate,
energy,
and
communications.
However,
within
these
sectors,
we
think
individual
stock-picking
remains
vital.
Overvalued
areas
to
underweight
include
industrials,
consumer
defensives,
technology,
and
financials.
Yet
even
within
overvalued
sectors,
there
are
often
numerous
undervalued
opportunities
for
those
investors
willing
to
spend
the
time
to
look
for
them.
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