November Commentary

The election is over, and that means we might finally stop receiving text messages for political donations! Over the next month, we will have a better idea of what the impact of the election will be on the markets, so we will save that discussion for our December commentary. In the meantime, let’s look at some of the key issues that can sometimes be drowned out by politics.

Corporate Earnings: Earnings have been growing well for over a year now. While growth in earnings is starting to slow, things still look to be pointing in the right direction.
The Economy: The U.S. economy continues to grow at a healthy clip. While U.S. employment numbers are starting to raise slowdown concerns, there is some optimism that global growth may pick up.
Inflation: Since inflation has come down globally, central banks are feeling much more comfortable that it is under control. That being said, prices remain high, and economists will continue to monitor inflation closely as new policies may cause prices to rise again.
Central Banks: With inflation way down in the past two years, central banks globally are starting to ease overnight bank borrowing, helping to stimulate economic growth.
Long-Term Interest Rates: While short-term borrowing rates are dropping, longer-term bond rates have recently started to rise. Expectations of increased global growth are the most plausible reason for this shift.

So, while we don’t yet know what the impact of the election will be, the economy, inflation, and central bank activities are pointing to continued growth for the markets. Despite both the economy and markets being on a much shakier footing than they were eight or twelve months ago, we must keep our eyes on how things might shift with fiscal policies, monetary policies, and global uncertainty. And that is why we are here!

Let’s dive into the issues mentioned above in a little more detail.

As we have highlighted in past commentaries, corporate earnings have really been doing most of the talking. As I write this, ~70% of companies in the S&P 500 have reported earnings for the third quarter 2024. The year-over-year earnings growth rate is about 5.1%, and the blended revenue growth rate is 5.2% (according to FactSet, a trusted financial data and analysis system for financial professionals). These numbers are solid, and while it is a slight decline in growth from some of the past quarters, it is a far cry from a recession, which is where some feared we were headed at the end of the summer. Earnings have grown for five consecutive quarters, and revenue has grown for sixteen consecutive quarters.

Not all sectors are benefiting the same. In the last month, Energy, Industrials, and Health Care sectors have lowered their Q4 earnings estimates looking forward, while Communication Services and Financials have raised their estimates.

It is amazing how the big corporate juggernauts impact the data. For instance, Alphabet (Google) and Meta (Facebook) had huge positive impacts on the growth in the Communications sector. The sector showed a quarter growth of 21.7%! However, if you “x” out the numbers from Alphabet and Meta, the growth rate drops to 7.3%.

U.S. GDP grew 2.8% in Q3. If we look at developed economies, the average GDP growth is around 1.8% in contrast. Average GDP growth for the U.S. has been 3.2% over the last eighty years. In the chart below, which highlights eighty years of GDP growth (quarterly), we can see that the U.S. economy is less cyclical, but the declines are sharper and deeper when they occur. Market data reflects the same characteristics. This also makes sense when we look at the company and business mix in the U.S. and how it has shifted in the last eighty years from manufacturing to more technology and services. This also helps explain why we recovered so quickly after the COVID crisis as compared to the rest of the world.

Source: macrotrends.net

The Federal Reserve cut interest rates on the overnight-lending rate by half of one percent in its September meeting. The current market predicts it will cut interest rates again in the November meeting. Except for the Japanese Central Bank, almost all major central banks around the world have been cutting interest rates or pointing towards cutting interest rates. Central banks are scaling back their restrictive monetary policy as they feel the major inflation threats are subsiding.

In October, the 10-year U.S. Treasury Bond Yield moved from 3.75% to 4.3%. This is a monster increase in rates, and many people have been speculating as to why. Because American journalists sometimes forget we live in a global economy, many pointed to the election and assumed outcomes as the driver. But if we look at the yield on 10-year Euro bonds, we see the same kind of movement, from 2.0% to 2.4%. Around the same time there was a big fiscal announcement for economic stimulus in China. If we really look at the move in yields globally, it seems to be more optimistic about growth going forward on support from central banks.

We recognize there is a lot to digest. As we always do, we will keep our eyes on things and make sure we are factoring in the environment and necessary changes in real time, so you don’t have to worry about it. Happy Thanksgiving to all!

Jordan Kaufman

Chief Investment Officer

Green Ridge Wealth Planning

September Commentary

Wow! A lot has changed in a month! At the beginning of August, the stock market (S&P 500) was in the middle of what would become a 10% drop, and here we are at the end of the month back at the highs. The market isn’t leaving people a lot of time to think and ponder, and if you were on vacation, you might have missed the whole thing. Luckily, we saw this as an opportunity to pounce and picked up some great securities during the decline, setting us up for some great returns down the road!

To note:

The odds of a recession are greater as the economy shows some signs of slowing.
Concern is increasing that the Federal Reserve is behind the curve….. again.
Interest rates on 10-year Treasuries are about the same (~3.9%) as at the beginning of the month.
High Quality (HQ) bonds are starting to act like risk diversifiers. When stocks go down in price, HQ bonds go up in price. This is good and the way it should be, but it hasn’t been that way in a while.
U.S. Stocks are up ~20% year to date.

There are a couple of things we want to unpack here. The odds of recession have increased slightly. We talked a lot about this in our August Investment Committee webinar. We are seeing a couple data points that are going in an unfavorable direction, including jobless claims, industrial production, and housing starts. We are also seeing improving data on the Consumer Price Index (CPI), which means inflation is pretty contained at this time. This opens the door for the Federal Reserve to normalize interest rates.

The market is predicting that the Federal Reserve will cut interest rates with 100% probability according to the CME FedWatch tool, a popular tool used to track the probabilities of changes to the Fed rate. 68% of the market thinks they will cut by 25 basis points, and the other 32% think they will cut by 50 basis points. These odds seem about right, but the key takeaway is that we are likely entering a Fed rate cut cycle. While the length and depth of this cycle will be driven by how the economy and inflation react, expectations are that it will last into next year and flatten out the yield curve. This is generally good for stocks, if everything goes as planned.

With respect to the election, the question to ask is, does Fed policy matter more than who is in office? Not an easy question, but this should highlight that the presidential election is not the only variable influencing markets. This is why we say so often that investing with politics is not the most profitable strategy. This election is likely to be close all the way up until the night of the election, so until there is more clarity, we believe the Fed is the main actor to watch on the Washington D.C. stage.

Some people are referring to the economy now as “normalizing” after enduring Covid, major business shifts, supply chain issues, and high inflation. This also means that people are seeing markets act more normal. Take for example, the relationship in price change for high quality bonds and stocks. When stocks run into trouble, investors tend to hide out in high-quality assets like bonds. When inflation was running rampant or when interest rates were zero, this relationship was less predictable. We welcome a more “normalized” market.

Lastly, the market has been defying gravity this year, and strong markets leading into the 4^th quarter tend to end strong. But with the addition of an election, global instability, and Fed policy added to the recipe, you never know where things will head. The promise we make is we will be watching closely, not taking anything for granted, and making the shifts we think are appropriate to weather any possible turbulence we might face on our journey.

Jordan Kaufman

Chief Investment Officer

Green Ridge Wealth Planning

Monthly Commentary: Looking Back at July

The market was clearly taken for a loop this Monday. For our take on that, please click HERE.

Here's our take on July.

We can’t believe it is already August! We probably say that every month, but it doesn’t make it any less true. While the changes in the election are much more interesting talking points, we'll let you all enjoy that discourse with others. We are going to stick to the market update(we have discipline)!

The S&P 500 hit 5,600 for the first time in July. The market ended higher on the month, but the end of the month had some turbulence related to concerns around the semiconductor industry, one of the leading aspects of the Artificial Intelligence craze.
Interest rates dropped significantly in July (measured by the 10-year yield on U.S. Treasury bonds). The drop was a combination of lower inflation data and weaker-than-expected economic data. Concerns are starting to mount that the Federal Reserve has kept policy too restrictive and is causing the economy to sputter out.
We had some big changes in the upcoming U.S. Presidential election. Former President Donald Trump survived an attempted assassination on July 13^th and pulled significantly ahead in the polls versus President Joe Biden. Later in the month, President Biden stepped down as the Democratic Nominee and was replaced by Vice President Kamala Harris. While we don’t have great insight to share on the political side, we can say that both events were followed by strong up days in the market.
Market predictions suggest the Federal Reserve will cut rates in September. In the last meeting, the committee added the language, “risk to both sides” regarding their concerns about growth and inflation. While this may seem like a subtle shift, the market interpreted it as a sign for upcoming changes.

Don’t let the recent market turbulence distract you from the banner year it’s having. Pullbacks like the one we just experienced are normal when a market goes up so fast and so fierce. Both the uptrend and “buy the dip” mentality are still in place. In fact, we see new market strength in small cap stocks. This is exciting because it’s what we call a rally “expanding its breadth”. These are generally good signs and are indicative of a continuation of strength we have seen in the past 18 months.

Interest rates can be confusing, so I won’t dive in too deep here, but the simple explanation is that interest rates have been relatively high for the past 30 months or so. The main driver has been high inflation. The Federal Reserve has a dual mandate: stable prices and economic growth. The inflation we saw after Covid caused the Fed and many economic pundits great concern over the mandate of stable prices. While prices remain high, the rate of change of those prices is back down to a more reasonable level. With a less than expected second quarter GDP print, new concern has emerged over the economic growth part of the mandate.

This gives the Fed a little more latitude to cut rates, and it seems the concerns over possible future raises has been stamped out for now. The market currently expects the Federal Reserve to cut short-term interest rates in September. By all traditional measures that the Fed uses for determining Fed Funds Rate policy, they should be cutting by now, but inflation is a scary thing, and they seem timid to claim victory here. Other central banks, such as the Bank of England, has already begun cutting rates, but they have a weaker economy than the one we have in the U.S.

As always, we continue to work hard for you.