Q3 2024

Dear Client,

The leaves are changing, the mornings are crisp, and the kids are back in school!  We hope you all are having a pleasant start to fall.  We have been enjoying the perfect fall weather in the mountains, which is all the sweeter given the certainty it won’t last too much longer.  We have also been working to make sure your investments are appropriately positioned as the markets ride the waves of shifting headlines, calamities, successes, and fears.  We’ve spoken and corresponded with many of you over the past quarter, but not all.  If you have any questions about your specific investments or portfolios, or just want to catch up, please let us know.  We are happy to arrange a time to meet or talk.

There were several big events that affected the markets during the quarter, but the Federal Reserve board making the first rate cut for the cycle was the biggest purely economic event.  The long awaited and extensively debated cut finally came in September and Fed Chair Powell chose to start with a large 50 basis point (.5%) cut.  We think it was a good choice for him to start big as it gave the market confidence as well as giving the Fed room to go smaller or stay big with subsequent cuts without causing undue panic. 

The index changes for the quarter were as follows (calculated from wsj.com/market-data):

S&P 500 change: 5.33% Q3, 21.44% Year to date (YTD)

S&P 500 Equal Weight Index: 9.09% Q3, 14.11% YTD

Nasdaq Composite change: 2.34% Q3, 22.29% YTD

Nasdaq Composite Equal Weight Index: 1.59% Q3, 7.59% YTD

Dow Jones Industrial Average change: 8.02% Q3, 12.68% YTD 

Ten Year Treasury Yield change: -14.06% Q3, -4.21% YTD

Crude Oil (WTI Front Month Contract) change: -16.3% Q3, -4.94% YTD

Gold (GLD ETF) change: 12.92% Q3, 26.96% YTD

Echoing our commentary in the Q2 note, the difference in the Equal weighted and Market Capitalization weighted indices was quite interesting.  However, this quarter the divergence was in favor of the Equal weighted S&P 500 index which speaks to the broadening we discussed 3 months ago.  This also resulted in the concentration in the largest S&P 500 components being reduced a bit, although the top ten still represent a very large 34.63% (https://www.slickcharts.com/sp500) of the total.  Also of note during the quarter was the large decline in interest rates and oil prices, and the large increase in the price of gold.

The interest rate decline was expected to some extent, as The Fed reduced the short term rate, but the size of the shift in longer rates was pretty large.  Having the benefit of writing this note during the second week of the new quarter, we have seen longer rates settle back a bit as economic numbers continue to show a strong economy and reduced inflation.  This has led to the expectation that The Fed will likely be cutting by smaller increments moving forward.   This scenario reminds us of the situation in 2018 when economists were expecting a recession, and the fear was that The Fed had no tools to fight recession given that rates were already effectively at zero (i.e. they couldn’t really cut rates to stimulate growth).  Now, having been through a pandemic, huge stimulus, runaway inflation, and a very stout rate-hiking cycle (which led to a rare year when both stocks and bonds made significantly negative returns), we are in the opposite position.  We have rates well above zero, an economy that seems to be handling that ok, and The Fed has the luxury of adjusting rates slowly or not at all as the next period of economic growth or contraction unfolds.

The strength of gold and weakness of oil during the quarter seems to tell opposite stories about expectations for inflation, but the inputs to the shifting prices of these two commodities are much more complicated than that.  Overall, we think the rally in gold is indicative of both political and economic uncertainty around the world, while the weakness in oil (which has somewhat reversed since the end of the quarter), speaks more to supply and demand factors specific to oil and the time of year.

 Speaking of politics, we are still expecting for there to be some volatility around the Presidential election.  It is remarkable to see how short term the headline view of the equity markets seems to be.  Here we are one month out from a very tight election and the market has yet to show any real concern.  It may be that the likelihood of split government, or the study of historical returns post-election, has led investors to look past it this cycle.  Or, we may still be in for a wild ride. We’ll (hopefully) know the outcome of the election by the time we write our next note.  In the meantime, we are treating it like any potential source of volatility: We are trying to make sure we have reasonable amounts of cash available for both your needs and any opportunities that may arise, and we are refining our shopping list.

We hope you all enjoy some of the cozy fall things, and we wish you a pleasant holiday season!  We will be here snuggled up to our computers, poring over earnings reports and sipping something warm.

Best Regards,

Bo and Lesley