Quarterly Market Letter- Q3 2024

By Bruce Thompson on October 15, 2024

October Client Letter

SUMMARY

• Stocks were quite volatile in Q3, as investors balanced good news on inflation and interest rates against forward looking concerns about the economy.
• When the dust settled, stocks as measured by the core MSCI All Country World Index (ACWI) returned 7% in Q3 and 18.2% so far this year.
• The Bloomberg US Aggregate Bond Index returned 5.2% in Q3 and 4.5% so far this year.
• A “Balanced Growth” 60% Equity/40% Bond mix of those two indexes returned 6.1% in Q3 and 12.9% so far this year.
• Stephanie Link, Hightower’s Chief Investment Strategist, reports that inflation is clearly making progress at 2.5%. The labor market is softening a bit yet still balanced – there is still one job available for every unemployed person. Economic growth came in near 3% in Q2 and is expected to track close to that for Q3.
• The Fed cut interest rates by one half a percentage point in September and is widely expected to make additional rate cuts in coming quarters.
• The 10-year US Treasury note is the benchmark for home loans. Anticipation of lower rates has led to a drop in yields from near 5.5% last year to 3.75% today. Mortgage rates have declined from a cyclical high near 7.75% to about 6.2% today.
• Lower mortgage rates could spark a rebound in building and bring more sellers on the market, helping to alleviate the housing shortage and resulting rent inflation, which has been the stickiest CPI component. This may provide some relief for commercial borrowers, which have been facing a significant refinancing “cliff” beginning in 2025.
• While intermediate and longer term bond yields are influenced by forward looking market bets, short-term bonds and savings rates are more directly controlled by the Fed. Based on that, average savings rates have declined less then bond yields – about 0.75% from cycle highs – -but may drop more meaningfully if the Fed continues to cut rates.
• Absent a recession, most forecasters don’t expect a return to the prior ultra-low rates, which were deemed necessary to support lasting recovery from last decade’s financial crisis.

It is always important to remember that the future is unknown. Just as it is important to maintain equilibrium during market corrections, it also is critical to keep our heads on straight, to not get overconfident when markets are skyrocketing.

From the perspective of past periods of rising rates, the economy’s “soft landing” performance is unprecedented and therefore hard to explain. That had been giving investors pause. But, in Q3 the markets “climbed the wall of worry,” as investors all at once seemed to decide that maybe the fabled soft landing is real.

The Last Shall be First?

As anticipated in our last letter, in Q3 there was a significant shift in equity leadership favoring broadly diversified portfolios. Equity categories considered more rate sensitive outperformed, while growth stocks lagged. For example, Real Estate Investment Trusts (REITS) and small cap stocks jumped 14% and 9% respectively during the quarter. The US Large Cap Value Index returned 9.4% vs 2.9% for the tech focused Large Cap Growth Index.

As another indication of the broader advance, the price weighted Dow returned 8.7% vs 5.9% for the S&P 500, which is capitalization weighted.

Moreover, International stocks as measured by the MSCI All World Index returned 8.1% in Q3. International stock returns for US investors have lagged the S&P during the last market cycle, due in part to the strength of the US dollar. With the Fed shifting to an easing cycle, the dollar may face downward pressure, as it has since July, favoring international stocks. This impact can be seen by comparing the 7.3% return for US investors in the MS EAFE (Developed Markets) Index during Q3 with the .08% return for foreign local currency investors in the same index.

Psst…There’s an Election in November!

Perhaps the biggest turnaround in Q3 has been in the race for the White House. With the non-stop media coverage, it is hard to believe it has only been a couple of months since President Biden stepped aside. The Democrats have staged a comeback in the polls, but the election is a toss-up.

At Lexington Wealth we take great professional care in our role, indeed our calling, as fiduciary advisors. When it comes to your money, that means being dispassionate, objective, and evidence seeking.

As we wrote in our July letter, which you can revisit here, the election could bring knee-jerk reactions and market volatility. But the fact is that, over the years, the party occupying the White House hasn’t been a significant factor for stock returns. The more critical factor for returns seems to have been whether there is a split government, which in the collective wisdom of the market and electorate, has served to limit extreme fiscal policies one way or the other.

We recently prepared this report on US Presidential Elections and Financial Markets. Among other telling data, it shows that going back to 1984, outside of the 2000 tech bubble, markets have been higher the year after every U.S. presidential election, with a median return of 21.5%.

Over the long run, whoever wins the election, we have enduring faith in our economic system, and in the ingenuity, innovation, and hard-working spirit of our country.

Forecasting and Trading May be Hazardous to Your Wealth

You may have detected that in the foregoing Q3 market recap, we purposely italicized every conjectural term to convey an important insight. The nature of Wall Street is such that market commentaries frequently are filled with forward-looking statements, some more subtle than others, and you should be careful about reading predictions as facts.  

Reflecting on what’s taken place in the economy and markets over just the last few years, it should be clear that forecasters, including those at top investment firms, have very foggy crystal balls!

Moreover, even if you somehow knew tomorrow’s headlines today, such as the results of the upcoming election, could you profit from it?

Recently, the folks at London-based Elm Partners created a “Crystal Ball” game testing how well 118 of the world’s top traders could do if they were given the news from the Wall Street Journal’s front page a day in advance.

Jonathan Authers, Senior Editor for Bloomberg, recently reported on the game results in his column, Knowing the Future Won’t Make You Money. They found that of the 2,000 stock trades made, just 51% were profitable, no better than a flip of a coin. Even if you could divine economic and political results in advance, guessing how the markets will react is another story entirely.

There is a larger insight here for clients. The best traders guessed correctly just half of the time. But it should be noted that every decision to say, sell out of the market, requires another decision on when to buy back in. The odds of a “round trip” trade beating a “buy and hold” position would be just 25%.

Over an investment lifetime, a trading strategy would involve many such buying and selling decisions, and the odds of beating a buy and hold strategy would be lower and lower the more one trades, probably infinitesimally low. It might “feel” good to get out of the market when things seem dicey, and one occasionally might get lucky, but the probabilities are in favor of staying the course.

That’s why we believe so fundamentally in the wisdom of maintaining a diversified, risk-appropriate asset allocation strategy, particularly in the real world where planning risks and human behavioral factors must enter into the equation.

Of course, beyond the opportunity costs or risks of missed returns, the trading game doesn’t factor taxes into the equation either, which can significantly reduce profits. We know you will agree with the adage, “It’s not what you make, but what you keep” after taxes and trading costs that’s important! No doubt, those who trade in and out of the market will be brokers’ and Uncle Sam’s best friend.

Staying the Course Doesn’t Mean Burying Our Heads in the Sand

The subject of taxes may be on your mind with the upcoming election. We assure you it’s on our minds as well, as is the other side of that coin, the national debt.

The election remains a toss-up and it’s premature to draw any conclusions about all the fiscal and tax proposals bandied about in an election year. Again, the ultimate composition of the purse-holding Congress will be at least as important as who wins the White House.

We assure you that Lexington Wealth’s advisor team, in partnership with Hightower and Fiducient, our outside investment research consultant, is staying on top of proposed tax policies and how they may affect your financial and estate plans.

Working with your estate and tax advisors, we will be proactively assessing and if necessary recommending strategies designed to maximize what one of our long time clients calls “the only truly restful shade of green!”

We wish you all the best that life may bring in this beautiful fall season. If you have concerns about your investments or financial planning, please don’t be a stranger. We’re here to help.

We’d love to see you at our fall client appreciation event on Wednesday, October 16^th at the Archer Hotel in Burlington, MA. Stephanie Link, Hightower’s Chief Investment Strategist will be our featured guest discussing valuable investment insights as well as the election’s impact on the markets. Feel free to invite a guest while enjoying cocktails and hors d’oeuvres.

Meanwhile, if you’d like to try your hand at the “Crystal Ball” game, you can play it here.

Lexington Wealth Management is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Lexington Wealth Management and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Lexington Wealth Management and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates. 

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