3rd Quarter 2024 Market Update – Staying Focused Amid Volatility and Rhetoric

Good afternoon,

We hope everyone is well and enjoying the fall season. As we head into the final stretch of 2024, we wanted to share insights into the current state of the U.S. economy and markets, discussing where we are and where probabilities lie going forward.

This year has been marked by a constant stream of sensationalist headlines and fear-inducing narratives, much of which has no place in making sound financial decisions. In times like these, staying focused on hard data—not rhetoric or the latest narrative—is essential. With the recent election, much of the political rhetoric has amplified market uncertainties, but it’s the data that truly guides us.

A Broad View of 2024 Markets

The year has seen an overall positive trend in U.S. stock indices, even as fixed income markets experienced significant volatility. Bond yields have shown wild swings:

    •    Long-term bonds fluctuated by about 80 basis points.

    •    Intermediate-term bonds shifted around 100 basis points.

    •    Short-term rates swung an impressive 150 basis points.

This bond market volatility, while challenging, also presented unique opportunities. We strategically diversified into alternative assets like gold, silver, and miners, which have proven highly beneficial. Recently, precious metals experienced heightened volatility due to a surge in sentiment following a strong uptrend, further impacted by Newmont Mining’s earnings miss, signaling a reversal. Last Friday, John took proactive measures, significantly reducing our exposure to precious metals and sharing the rationale in an email. Our allocation now sits at 5%, down from a peak above 40% a few weeks ago. While the stalled uptrend has introduced additional downside risk, we’re closely monitoring for a solid re-entry point.

Bitcoin has also provided a notable boost to portfolio performance. Although it remains highly volatile, a conservative allocation of 3-4% has generated solid returns, especially following positive rhetoric from the current administration. 

In contrast, the U.S. Oil market has been unpredictable. Despite this, the XLE sector has performed reasonably well. Additionally, we’ve leveraged factor exposures in the U.S. equity markets, focusing on High Beta, Growth, Small Cap, and Mega Cap sectors, while using low volatility, quality, and high dividend factors to hedge against more volatile counterparts. Below is a chart showing returns of different equity and fixed income sectors along with factor exposures. This provides some insight into what is currently performing well and what isn't.

The Federal Reserve, Jobs, and Inflation

The Federal Reserve has implemented 75 basis points in rate cuts so far this year. With a new administration, the probability of further rate cuts in 2025 has lessened, though this is subject to change as new economic data emerges.

The job market has held up well with historically low unemployment, signaling broader economic resilience. However, the upcoming months may clarify whether reported strengths in the job market hold true. Every administration tends to “polish” data in election years, so a closer look post-election will be insightful. While inflation has shown signs of cooling, pressures could resurface, potentially benefiting precious metals and commodities as we head into 2025. Importantly, although inflation rates may be “cooling,” we are still contending with a cumulative 21% increase over the past three years—a major contributor to household financial stress.

A Look Ahead – Quad Framework Insights

Our proprietary Quad framework continues to guide our approach. Currently, the U.S. economy is in a “reflationary” environment, typically favorable for stocks. However, as we enter Q1 2025, there is a possibility we could transition into an “inflationary” environment, which would support commodities and precious metals.

Globally, regions like the Eurozone, Japan, and Australia show promising setups as we move into 2025, adding to our opportunity set for diversification.

Elections and Markets

Many clients wonder how the election impacts markets. Historically, elections create short-term volatility, but data ultimately drives market direction. Our current positions reflect confidence in the economic fundamentals, not political narratives. The election hasn’t altered our strategy, but it has given us additional clarity and confidence in the positions we hold. If the administration enacts large deficit reductions or slashes government spending, we could see short-term economic headwinds with potential long-term gains. Some analysts see a parallel to the early Reagan years, with a potentially tough first couple of years followed by a period of growth. We’ll focus on the data, not political speculation, as we move into this new era.

As always, we continue refining our approach and incorporating the latest data to enhance our clients’ portfolios. We’re committed to navigating these transitions and positioning our clients for long-term success.

Thank you for your trust and partnership. If you have any questions or would like further information, please don’t hesitate to reach out.

Wishing you health, happiness, and a wonderful rest of the year!

All the best,

The Forecast Team