Market Commentary - October 2024

Monthly Update

The market focus in October seemed to have shifted most of its attention to the elections and this monthly letter would not be complete if it didn’t creep into an early November rundown of the main events, those elections and the Federal Reserve meeting. Markets were little changed in October but in response to the November 5^th presidential victory by Donald Trump, exploded higher in the days that followed. Also, the Fed cut the fed funds rate by 25 basis points as expected two days after the election and remains with an easing bias.

What the market did in October was take a breather ahead of the election after a steady run of monthly gains that has surpassed many expectations with most of the rally being earnings multiple expansion. The S&P 500 fell 1% with the NASDAQ slightly outperforming, down by .5% and the small cap Russell 2000 underperforming with a 1.5% drop[1]. If there is one good thing with the broad stock market since the market peak in July was the broadening out where the biggest Mag 7 stocks finally splintered up and money found its way into other things, including small, mid and international stocks.

International markets were mixed with the Japanese Nikkei up by 3.1% while the Hang Seng fell by almost 4%[2]. Though the Nikkei rally comes after 3 months of declines while Hang Seng had an explosive rally in September. The Euro STOXX 600 index was down by 3.4%[3]. Flowing through these markets has been both fiscal and monetary policies implemented that impacted their markets. The Bank of Japan did not raise interest rates as expected but are expected to again in either December or January. The Chinese have announced a slew of steps to both put a floor under their troubled residential real estate market and to try to lift stock prices. The European Central Bank cut rates for a third time, aiming to stimulate sluggish economic growth as inflation continues to decline.

With regards to the election, we’ll focus here just on policy and not politics as we invest focused on the former, not the latter. Legislatively, the key thing to watch in 2025 is the fate of the Trump tax cuts which will expire at the end of next year. Negotiations I’m sure will soon follow after the new year. At best though, they will get extended but I’m sure some tweaks within the bill will take place, such as with the SALT deduction. Paying for it though I do believe will be a focus too and could be an offset. On the corporate tax side which Trump cut the rate from 35% to 21% at the end of 2017, that does not expire and will remain in place. So, at best, tax rates, give or take, will remain pretty much the same rather than the long hanging tax cut fruit the previous Trump administration was able to pull.

It will be on the regulatory side that we should expect more notable changes, particularly as the heads of all the major agencies will change personnel and a likely lighter touch to regulations will be the result. Most influential in terms of change will likely be at the Federal Trade Commission, SEC, the CFPB (Consumer Financial Protection Bureau) and the Department of Energy, along with the EPA and sectors like financials and energy are highly focused on this. Also, a new FTC head will most likely lead to a higher pace of M&A transactions.

With regards to the Federal Reserve’s widely anticipated rate cut, a lot has changed since the initial 50 basis point cut seen in September that might have resulted in a Fed that would take a November break but instead, they continued. Since the September rate cut, both short-term and long-term interest rates have moved sharply higher. The 10-yr yield was 3.60% the day before the September meeting and stands at 4.30% as of this writing, and after the November cut[4]. The short end of the yield curve has also reduced its expectations for the number of interest rate cuts we’ll see next year by about 100 basis points. These movements are a result of a few things. Number one, inflation expectations in the TIPS market have risen since the Fed got more aggressive with cuts. Number two, the economic data has been pretty good overall, notwithstanding a lot of mixed and uneven data. Number three, the growing worry about the rising size of US debts and deficits and the possible challenge of financing it is apparent. And these concerns are not just isolated to the US as the UK gilt market sold off over worries about the new UK budget from the new government that will lead to even greater gilt issuance.

Expanding on my point above, while the economy grew 2.8% in Q3, the internals have reflected a two-lane economic highway[5]. In the fast lane there has been upper income spending where the much higher home and stock prices have dramatically raised net worth for those that have assets. Also, anything deriving revenue from the massive amount of CapEx spend on generative AI are seeing robust growth. Lastly, the large amount of government spending is also lifting economic activity, particularly in healthcare via growing Medicare and Medicaid payments, along with beneficiaries of the Inflation Reduction Act and CHIPS Act and the infrastructure bill passed a few years ago.

The other important market focus in October was the Q3 earnings season where about 75% of companies that have reported exceeded analyst expectations, which is about the average seen over the past 10 years according to FactSet[6]. The pace of the beats though is running below average and revenue beats are as well. FactSet also highlights that most of the earnings growth in Q3 are coming from the biggest 7 stocks in the S&P 500 of in the high teens percentage wise in the growth rate whereas the remaining 493 are only expected to see a slight low single digit increase.

Conclusion

We are asked all the time as to whether we will change our investing strategy depending on the election results. We of course absorb any economic changes that might come our way in terms of our analysis of business activity and what it means for earnings growth but nothing that will change our big picture, long term investing focus.

That said, what the impact will be on interest rates does impact our fixed income side of our investing strategy, which certainly matters too for stock valuations. And regardless of who was going to win, we felt that high US debts and deficits and persistent levels of inflation, notwithstanding the recent deceleration, was going to lead to the risk of higher long-term rates, thus keeping us focused on shorter duration securities.

We also acknowledge the big picture that the days of zero rates and massive quantitative easing are over. While the Fed, and some other central banks, have embarked on a rate cutting process, we view this right now as more of a tweak in policy rather than a trip back to zero interest rate policy. So, we believe higher interest rates for longer are here to stay.

With respect to equities, we acknowledge the growing valuations in the face of higher interest rates but our wide dispersion of investments is helping in owning also cheaper things.

Whatever comes our way though, whatever this new administration brings us, it remains vital that investors have adequate short-term liquidity over the next 2-3 years. Knowing that period is covered can help separate the balance of one’s portfolio from the ups and downs of the market. Time horizon is always crucial and is always the best friend of any investor. We are not just in the asset management business but also in the risk management business and always believe that by watching our back and focusing on the risks, the upside should take care of itself.

Disclaimer

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Stoxx Europe 600 index also called the STOXX 600 is an indicator of the performance of the European stock market. It measures the performance of large mid and small-cap companies across 17 countries in Europe. The number of constituents is fixed at 600.

The Hang Seng Index is a freefloat-adjusted market-capitalization-weighted stock-market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 82 constituent companies represent about 58% of the capitalization of the Hong Kong Stock Exchange.

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The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

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[1] Bloomberg

[2] Bloomberg

[3] Bloomberg

[4] Bloomberg

[5] Bloomberg

[6] FactSet