Third Quarter 2024 Review & Outlook

“Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.” – Warren Buffett

Review

We are all aware the stock market does not move in a straight line. On August 5th the S&P 500 briefly traded 10% lower from the level it hit just three weeks earlier, which at that time was a high for the year. Many market pundits started discussing the possibly of a prolonged bear market. But by the end of the third quarter the market had rebounded and traded at a new all-time high, eclipsing the highs from mid-July. While the market has been led for quite some time by the performance of the top technology stocks, referred to as the Magnificent 7, the market participation broadened during the third quarter with strong performance from other sectors such as utilities, industrials, and financials. More stocks participated in the upside during the quarter, with value stocks outperforming growth stocks and small-cap stocks outdoing large-cap stocks.

The S&P 500 increased 5.9% in the third quarter, the fourth consecutive quarterly increase and the seventh of the past eight quarters. This year marks the best returns for the S&P 500 through the first nine months of the year since 1997 according to Bespoke Investment Group. The Dow Jones Industrial Average (DJIA) was up 8.7% and the NASDAQ Composite was up 2.8% during the quarter. The best performing sectors during the quarter were Utilities, Real Estate, Industrials, and Financials, all of which gained at least 10%. The only sectors that performed worse than the S&P 500 were Energy, Technology, and Communication Services, with Energy as the only sector posting a negative return during the quarter. Year-to-date through September 30th, the S&P 500 is up 22.1%, the DJIA is up 13.9%, and the NASDAQ is up 21.8%.

The bond market enjoyed a rally during the third quarter with the 10-year Treasury Note yield falling from 4.4% at the end of the second quarter to 3.8% at the end of this quarter. The Federal Reserve began its monetary policy easing campaign with the first interest rate cut on September 18th. The Fed felt confident enough with the progress made on inflation to lower the Fed Funds rate by 0.50% at the September meeting, which was the first interest rate cut in four years. The Fed funds rate now stands at the range of 4.75% to 5%. The Fed forecasts two more 0.25% interest rate cuts through year end, and four more cuts in 2025, which would push the Fed Funds rate down to 3.5%. But as Milton Friedman noted decades ago, “monetary changes have their effect only after a considerable lag and over a long period,” so it will take some time before the economy feels the full impact of lower rates.

However, the decrease in the short-term interest rates should provide immediate relief to consumers with credit card balances and to small businesses with variable rate debt. Long-term rates for such things as mortgages have already been declining this year in anticipation of the Fed lowering rates. Mortgage rates had surged from 3% at the end of 2021 to nearly 6.5% by the end of 2022, then hit a peak just under 8% in 2023. Mortgage refinancings will be limited at current rates since the Federal Housing Finance Agency shows that roughly only one in seven residential mortgages had an interest rate of 6% or higher in the first quarter of this year.

Outlook

Third quarter corporate earnings reports will start up the week of October 7th, which will give investors important insights into how corporations are performing. According to CFRA Equity Research, S&P 500 third quarter earnings are expected to grow 4.8%, followed by a significant rebound to 12.4% for Q4, which would equate to a full year 2024 earnings growth of 8.9%. Looking out to 2025, earnings are expected to post strong growth of 14.2%. Fears of a recession remain low, especially with the strong results from the September labor market report released on October 4th. According to Action Economics, a recession is unlikely in the year ahead considering its projection of real GDP growth of 3.0% for the third quarter, following by growth of 2.0% in the fourth quarter, with an advance of 2.3% in 2025.

Similar to Action Economics, Ed Hyman, chair of Evercore ISI and head of the firm’s economic research team, no longer sees a recession coming. Hyman forecasts 1% GDP in the fourth quarter of this year followed by 1% growth for the first two quarters of 2025, 2% in the third quarter and 3% in the fourth quarter of 2025. He cites a low level of layoffs, high liquidity, record household net worth, slowing inflation and an expectation of lower interest rates. In addition, the Atlanta Fed’s GDPNow model forecasts a 3% increase in GDP for the 3rd quarter of this year.

Despite the expected positive corporate earnings landscape and positive economic growth, we understand the elephant (or donkey) in the room facing investors is the upcoming election next month. Naturally, many investors worry about their investments in case the “other” party wins the election. We caution against placing too much emphasis on the political landscape when making investing decisions. Here are several data points that back up our reasoning on election thoughts and economic projections:

  • According to Bespoke Investment Group, “Even if we adjust stock market performance for each President based on when they were first elected or assumed office (in cases where they weren’t elected) rather than looking at Inauguration Day to Inauguration Day, the difference between Republican and Democrat Presidents doesn’t vary widely. Since 1900 the median stock market performance for the Dow Jones Industrial Average is identical as the return has been 6.6% under Democrat Presidents and 6.6% under Republican Presidents.”
  • Bespoke further provides the following comments on a buy and hold strategy: “Letting political beliefs get in the way of “Buy and Hold” has been extremely costly to investors. Going back 70 years, $1,000 invested in the U.S. stock market only when a Republican is President would be worth $27,400 today. $1,000 invested only when a Democrat is President would be worth double that at $61,800. But that $1,000 would be worth $1.69 million today for those who put politics aside and stayed invested regardless of who’s in charge in Washington D.C.”
  • U.S. Bank investment strategists studied market data from the past 75 years and identified patterns that repeated themselves during election cycles. While the analysis doesn’t point to elections having a meaningful medium-to-long term market impact, they could affect individual sectors and industries. Different election outcomes have the potential to affect proposed policies and regulations that could affect tax policies, energy, infrastructure, defense, health care policy, regulation, etc. Despite constant headlines revolving around elections, investors are well served to focus most on factors such as economic growth, interest rates, inflation, and corporate earnings when making portfolio decisions.
  • According to Ryan Detrick, chief market strategist at the Carson Group, over the past twenty four-year administrations, going back to Eisenhower, the stock market has risen 17 times. Basically, the stock market tends to go higher regardless of which political party or president is in office. Ryan Detrick also said investors should focus more on the composition of Congress rather than the presidential race.  From 1951 through 2023, when Democrats had full control of Congress, the S&P 500 averaged a 6.7% annual return. When the Republicans had control in that time period, that jumped to 11%.  But when Congress was split, the S&P 500 posted an impressive 14.5% average annual return.
  • According to CFRA’s The Outlook, “history reminds us that the S&P 500 gained an average of nearly 3% in the final two months of election years since 1992, along with gains in all sizes, styles, and sectors.”  Furthermore, according to Bespoke Investment Group, the fourth quarter of the year has been the best for the S&P 500, with an average gain of 4.2% and gains 79% of the time.

Barron’s Magazine recently summed up the current investing environment by stating, “The silver lining today is that the fed-funds rate is likely heading lower, not higher, since the rate of inflation has already been more than cut in half from its peak. That means that even as economic growth slows down, it won’t fall too far. Consumers and businesses will have more capacity to spend, allowing corporate earnings to keep growing. Lower interest rates, meanwhile, will make bonds less attractive relative to stocks, potentially sending more money into equities. If history repeats itself, stock investors will have been rewarded for staying invested.”

The overall moral of these points is to not let politics affect your long-term financial plan and investment strategy. As Warren Buffett noted in the quote at the top of our letter, it has been a losing proposition to bet against America. The political landscape will continue to change and evolve, but with the ingenuity of corporations and the overall US economy, we believe the potential for long-term growth in the stock market will endure.

Please let us know if you have any questions or if you would like to discuss your financial situation in detail. Thank you for being clients of our firm.

Sincerely,

Marietta Wealth Management, LLC

The information provided is for informational purposes only.  It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice.  Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein.  Individual circumstances may vary, and results discussed are no guarantees of applicability or future performance.

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