A Glass Half Full

All eyes were on the Federal Reserve during the third quarter as investors and pundits tirelessly debated what month we would get an interest rate cut and the magnitude. For the networks and press, it provided opportunities for clicks and consumed (endless) airtime. We found this debate inconsequential in the long run as from our perspective the direction matters more than the velocity.

It is significant, however, that we have now entered an interest rate reduction cycle while the economy’s fundamentals seem to be quite sound. The Fed may have pulled off the economic unicorn of the legendary soft landing. Soft landings are rare as typically when the Fed is cutting interest rates the economy is in distress which forces the Fed to react aggressively in a rescue effort that typically is too late.

Reducing interest rates from a position of economic strength creates an appealing backdrop for investors, and the market confirmed this from its bullish action in the third quarter. The S&P 500 rose +5.9% in the third quarter and for the year has a return of +21.9%1. It’s worth noting that fixed income investors have seen solid returns as well as during the quarter the Bloomberg US Aggregate Index posted a return of +5.8%1.

When reflecting on the strength in the third quarter, it’s important to remember the path was not linear as the chart above shows. Early August we had a sharp sell off that we highlighted in our latest note “All Bark, No Bite”. This was followed by another dip in early September fueled by economic growth concerns. Both events presented buying opportunities and support our approach of not letting emotions and short termism drive behavior.

As we look to the fourth quarter, we believe there are numerous reasons for optimism.

  • We are likely to see front-end rates cut at least 0.50%, which will ease pressure on consumers2.
  • Central Banks outside the US are also reducing interest rates, including Europe and China.
  • Lower gas prices may help spur consumption elsewhere and allow for more financial flexibility.
  • Seasonally, the fourth quarter is typically the best quarter for the S&P 5001.
  • Lastly, and most importantly, the labor market remains healthy.

It is difficult to understate how resilient and important the labor market strength has been. The economy continues to add jobs, and the unemployment rate is 4.1%3. Having a strong labor market has afforded the Fed the flexibility to maintain higher rates for longer, thus helping in the inflation fight.

Falling interest rates will put pressure on investors holding money market funds. Money market inflows have been simply stunning since the Fed began its rate hiking path, with money market fund rates exceeding 5% for a while. As the Fed continues to cut, money market fund investors will need to take action to achieve more return. We think this will have positive ripple effects for both stocks and bonds.

The election is also nearing, and this one will be contentious, as have the last few elections. Dan Clifton, who is the Head of Policy Research for Strategas Securities and is ranked as the top independent research analyst on Wall Street, described the current election cycle as “the most exciting election he’s ever seen”4. While exciting may not be the word most may use, it’ll certainly lead to emotional swings both for passionate voters and the market.

No matter who wins, roughly half of our client base will end up potentially dissatisfied and distraught. We think it’s important to remember in the long run, markets don’t care who’s in the oval office. Selling and sitting out an opposing party’s political term is a recipe for disaster for long term wealth creation.

We are extremely fortunate to live in a democratic country which thrives upon capitalism. Long term we will see the pendulum swing from party to party, but the checks and balances of our system will keep our nation on course. The most important lesson that time has taught us is this – stay invested.

These next few months we will see volatility, that is almost guaranteed. It could source from a manner of places from the election and fear of policy changes, escalating geopolitical tension, our growing government budget deficit, or potentially something not even on anyone’s radar today. Volatility, which is uncomfortable, creates opportunity, which we seek to take advantage of.

 

It’s our pleasure to continue to serve you and we are thankful for your trust.

 

John Cheshire
Chief Investment Officer

Bryce Goldbach, CFA ®
Portfolio Manager & Wealth Strategist

10/9/2024

 

CITATIONS

[1]  www.strategas.com “Quarterly Review in Charts Friday, October , 2024.”
[2] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html “CME FedWatch.”
[3] Goldman Sachs “USA: Payroll Growth Well Above Expectations and Revised Up in Prior Months; Unemployment Rate Declines to 4.1%”
[4] www.strategas.com “Election Update Webcast as of 10/02/2024”
[5] https://go.ycharts.com/hubfs/How_Do_Presidential_Elections_Impact_the_Market/Election_Guide.pdf “How Do Presidential Elections Impact The Market?”

DISCLOSURES

Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, and Asio Capital makes no representation or warranty as to the accuracy or completeness of the information