At Grey Ledge Advisors, we’re always keeping our eye on the markets as well as the trends affecting the investment landscape. In this blog, we’ll take a look at the market’s recent performance, ongoing debates over the fiduciary standard and socially conscious investing, the role of AI in financial advising, and how young workers are saving for retirement.
Market update
Recent market performance generated some troubling headlines, including a single-day drop in the Dow of more than 1,000 points and the S&P 500 posting its worst day in two years. This downturn occurred during a tumultuous week as investors reacted to economic data that was significantly weaker than anticipated.
Non-farm payrolls in July grew by just 114,000, falling well short of the expected 185,000, while unemployment rose to 4.3%, its highest level since October 2021, sparking fears of a recession. The Bank of Japan unexpectedly increased its interest rate by 0.25%, which shocked the markets and triggered a steep decline, with losses of 5.2% and 12.2% in a single day. The Nasdaq and S&P 500 also fell by more than 3% each.
However, after a week, the market regained its footing with positive economic data and lower weekly jobless numbers, recovering all the losses. The unwinding of the yen carry trade, where traders and hedge funds borrow in the cheaper yen and invest in dollars, caused the initial panic. Investors should brace for upcoming election-related volatility as candidates unveil their policies and more economic data reveals the state of the economy, setting expectations for 2025.The Federal Reserve may implement interest rate cuts if the job market weakens as expected by the central bank.
Despite these fluctuations, this performance remains within the parameters of a normal market correction, which helps temper overenthusiasm about certain investments, brings stock prices back to more realistic values, and reduces the risk of bubbles forming in specific sectors. Looking at long-term trends, all major indexes have been trending positively.
The Dow is up about 12 percent year-over-year and 4.7 percent year-to-date. The S&P 500 has grown nearly 20 percent year-over-year and 14 percent year-to-date, with the Nasdaq showing a similar trend.
Debate continues on fiduciary standard update
Financial advisors have long been legally required to follow the fiduciary standard, which stipulates that they must act in the best interests of their clients and avoid conflicts of interests. This requirement was set with the Investment Advisers Act of 1940, while the Employee Retirement Income Security Act (ERISA) of 1974 established similar fiduciary responsibilities to parties exercising control or influence over the assets of a retirement plan.
Earlier this year, the U.S. Department of Labor released a new rule expanding the definition of which professionals qualify as fiduciaries under ERISA. The department said there are a “plethora of investment professionals” who are currently exempt from the law’s protections, and that the expanded rule aims to have these parties follow the fiduciary standard as well.
Although the rule was set to go into effect on September 23rd, it was challenged by certain groups (including insurance brokers) who claim it exceeds the Department of Labor’s authority and would create excessive compliance requirements. The U.S. District Court for Northern Texas recently stopped implementation of the rule, and the Department of Labor is likely to appeal.
While this matter works its way through the court, the current ERISA rules will remain in effect. Grey Ledge Advisors is a fiduciary under ERISA, and its advisors act in the best interest of their clients.
ESG “tiebreaker” rule back in the courts
An investment strategy that has developed political overtones is also back in the courts. Following the Supreme Court’s decision to scrap the Chevron deference, a U.S. appeals court ordered a Texas judge to reconsider his opinion upholding a rule from the Biden administration on environmentally and socially conscious investment strategies.
The rule, established in February 2023, allows 401(k)s and other investment plans to take environmental, social, and corporate governance (ESG) considerations into account when choosing between two or more similar investment options. This rule has been challenged by the oil company Liberty Energy as well as 25 Republican-led states.
ESG investing has gained popularity as a way for people to consider factors such as a company’s labor practices, transparency, and commitment to environmental sustainability when choosing where to invest their assets. This allows investors to support companies that share their values, though it also has certain drawbacks such as a more limited pool of investment options and the potential to miss out on investments that post substantial gains. The trend has also inspired a wave of state-level legislation either supporting or blocking ESG in public investments
In another recent court decision regarding ESG investments, a federal judge in Missouri recently struck down a state law that would have required financial advisors to disclose whether they were taking ESG factors into account and obtain consent from their clients in order to do so. Opponents of the law argued that this was unnecessary since financial advisors already follow the fiduciary standard in considering the best investment options for their clients.
The growing role of AI in wealth management
During the writing of this blog, we asked an artificial intelligence (AI) platform if it had any investment advice based on current trends. It returned a few paragraphs of general advice, encouraging us to diversify our portfolio, consider long-term investments…and to go talk with a flesh-and-blood financial advisor.
It’s clear that AI still has room for improvement. There are a growing number of robo-advisor options that will set up and periodically rebalance portfolios based on information a person provides when setting up their account, and consumers often find this to be a convenient way to invest. However, robo-advisors also have a more constricted range of investment options, struggle to keep up with volatile market conditions, and generally fail to connect meaningfully with human social behavior.
Many industries have been alarmed at the growth of AI and its potential to supplant human jobs, only to find that it is better to implement AI as a supportive tool rather than a replacement one. AI has been a useful way for financial advisors to streamline certain services and dedicate more time to creating customized portfolios that meet the changing circumstances, ambitions, and concerns of clients.
Gen Z gets a jump on retirement planning
Now that Millennials are careening into middle age and Gen Z is entering the workforce, it’s their turn to be on the receiving end of criticism from older generations about their spending habits. But hold that barb about avocado toast…several studies are showing that these young adults are quite budget conscious.
MSN recently wrote about Gen Z workers who have been making a strong effort to put aside a substantial portion of their income early in their careers to start a foundation for their retirement savings. A study by the British bank NatWest also found that 69 percent of Gen Z respondents in a recent survey had created a budget to manage their finances, compared to just 42 percent of Baby Boomers.
The wide availability of retirement savings plans has also been beneficial to younger workers. A recent report by the Morningstar Center for Retirement and Policy Studies found that Gen X and Baby Boomers are most likely to be affected by employers’ move away from defined benefit pension plans, and estimated that 52 percent of Baby Boomers and 47 percent of Gen Xers may experience retirement insecurity.
By contrast, Millennials and Gen Z are more familiar with today’s more common defined contribution plans like 401(k)s, and have also been able to benefit from features such as auto-enrollment and auto-escalation. Morningstar estimates that a lower share of the younger generations (44 percent of Millennials and 37 percent of Gen Z) may face retirement insecurity.