Asset Allocation Chart of the Month
Fed Easing: Glass Half Full
- The Fed has kicked off its rate-cutting cycle with a bit of a bang, choosing to lower the Funds rate by 50 instead of 25 basis points. Fed Chair Powell’s message was that they acted out of opportunity as opposed to necessity. While time will tell if this is true, we believe this is an important distinction.
- We remain in the soft landing camp, though have suggested that there are downside risks to our forecast. Starting with a 50 basis point cut may help mitigate those risks, which we find encouraging.
- From a historical perspective, the start of an easing cycle typically bodes well for stocks over a 12-month time horizon.
- However, the record is not spotless. There have been a few very painful market outcomes. Two of those occurred during the early 1980s when Fed Chair Paul Volker was ratcheting rates up to levels never seen before and then bringing them back down in rapid fashion. Unsurprisingly, stocks were volatile during this period. The other negative experiences occurred when the Fed had to respond to deteriorating economic conditions.
- In more benign easing cycles, a common factor was a relatively strong economy. Similar to today, economic conditions were resilient enough to endure higher rates without slipping into recession.
- We reviewed 10 easing cycles since 1980. The median price return for the S&P 500 Index in the 12 months following the first rate cut was 9.3%, while the Russell 2000 Index had a median return of 7.0%. Both indexes posted positive returns in 6 out of the 10 periods. We examined four additional easing cycles prior to 1980. In those four cycles dating back to 1960, S&P 500 Index delivered double-digit positive returns in each instance.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA - Vice President and Senior Fixed Income Strategist, and Brian Cheyne, CFA, CIMA - Senior Investment Strategy Specialist, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800-638-8194 for more information.
A Word About Risk
Investing in fixed-income securities which can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities which may be downgraded by a Nationally Recognized Statistical Rating Organization (NRSRO) to below investment grade status. U.S. government agency securities which are neither issued nor guaranteed by the U.S. Treasury and are not guaranteed against price movements due to changing interest rates. Mortgage-backed securities and asset-backed securities are subject to the risks of prepayment, defaults, changing interest rates and at times, the financial condition of the issuer. Foreign securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. Emerging markets securities which are more likely to experience turmoil or rapid changes in market or economic conditions than developed countries.
Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data given. For performance information current to the most recent month-end, visit TouchstoneInvestments.com/mutual-funds.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.
Touchstone is a member of Western & Southern Financial Group
Not FDIC Insured | No Bank Guarantee | May Lose Value
