What costs billions of dollars, takes over two years of preparation, but only a few days to actually complete? Some pay attention for the entire time, others are just tuning in now, and some will ignore it all together. Any guesses? A clue: it starts with Presidential and ends with Election 2024. Regardless of who you think is “right,” the argument is often difficult to clarify and the confrontation so toxic that it can devour the joy from our daily lives. Today’s public discourse and the media bombardment of so called “news” is worse than a sibling fight over who gets the last piece of Halloween candy. Politics carry emotions and feelings, and markets do respond to some of those feelings in the short run. But unlike the day-to-day changes of an election cycle or the unpredictable side effects of a sugar high, markets are always looking at the longer-term fundamentals. No doubt that this election will have a long-term impact on theeconomicfabric of our country. But through continued long term comprehensive planning, we remain well positioned for either election outcome. The election fatigue and the world ending news cycles create this idea that the world will somehow “end” without either candidates’ worldview in place. If history teaches us anything, it is that markets are resilient and where there is opportunity, no matter how small, growth is possible. We remain focused on exploiting both current and future market opportunities. We continually monitor risks in the world and stand prepared to react accordingly. If you only take one thing from this update, let it be that we have hope and no matter the outcome on November 5th,we will continue to plan together for a meaningful future. The news continues to talk about inflation, wars, recession, debt, etc. These topics are important, however, let’s look at a few items the news cycle omits. Although credit card debt has risen, and auto loan defaults continue to increase, we still see cash building on the market sidelines. Total money market balances as of last week surged to $6.4 trillion – up by a record $130 billion. If we track this number back to when the Fed started raising rates, it was closer to $4.2 trillion.[1]As rates come down and as market opportunities present themselves, we see this number as constructive, and it represents a lot of buying power in the market. Interest rates remain sticky, even after the FED’s 50bps September cut. The 10 Year Treasury remains at or around 4.00%[2]. Money Market positions – like VUSXX – remain at or around 4.80-4.90% effective yield.[3] Inflation also remains somewhat sticky however it has fallen for the 6thconsecutive month to 2.4% in September 2024.[4] Falling inflation and rate cuts all take time to filter through the economy, so we will not feel this pressure reduction immediately. But it remains a positive sign for the economy. Regardless of a “soft landing” or not, the recession argument cannot be made only on rates or inflation. [1]Fsinsight. Thomas J. Lee CFA [2]TMUBMUSD10Y | U.S. 10 Year Treasury Note Overview | MarketWatch |
 |
TheDHTInvestment Committee made a tactical position change in our bond holdings in July 2024. We extended the duration of our holdings to prepare for the September rate cut and projected future cuts. We remain focused on higher credit quality bonds and by extending the duration of those positions we can benefit from continued reduction in rates / inflation. We also remain fully focused on USA equity positions. This has been a key position placement for over 10 years. Despite the news cycle’s continued talk about foreign opportunity, the data shows a much clearer picture as to who is winning the growth race. When we look at China, they have underperformed the U.S. by almost -77% in the last decade.[5]This lag is not localized to China. When we look at nominal GDP in the USA vs. Europe, you can see a clear difference as illustrated below. Respected Hedge Fund Manager and Market Commentator Kyle Bass notes the following, “Europeaneconomicoutput (nominal GDP) has stagnated and only grown 11.2% over the last 16 years. U.S. GDP has grown 94% over that same period.”[6] [5] Fsinsight. Thomas J. Lee CFA [6]Kyle Bass – Hayman Capital Management L.P. |
Image: Nominal GDP USA 2008-2024 |
 |
Image: Nominal GDP Eurozone 2008-2024 |
 |
The difference is not hard to recognize, but again when you look at the short run only or the latest news cycle that says non-U.S. equity is pulling ahead of XYZ, you must also look at the long-term trend. And there will always be bumps along the way but staying disciplined through the bumps and staying strategic and not reactionary is crucial to investing for the future. Again, we are monitoring the risks, and we continue to keep an eye on recessionary indicators. However, one that has not changed from green yet is S&P earnings. Although early in Q3 reporting, of the 72 companies that have reported, 81% are beating estimates so far. If we look at Q2 2024 we see 78% of companies beat estimates. That 78% exceeds the 5-year average of 77%.[7][8]We also must consider the FED Rate cut, since we are not in an official recession. When we look at previous rate cuts outside of recessions, the S&P is up 3 months later 7 of 7 times and up 6 months later 7 of 7 times. So, even with the election in play, the 1-month volatility is much higher than the 6 months to 1-year estimates.[9] We expect volatility to remain elevated through the month of the election due to many emotional and temporal factors. That being said, the $6.4 trillion on the sidelines, the FED rate cut policy being stimulative, and a clearer direction post November 5th,places the market in an overall positive space. And, when we look at historical transfers of power between parties or within the same party, we can see an interesting trend. [7]S&P 500 Earnings Season Update: August 9, 2024 (factset.com) [8]Fsinsight. Thomas J. Lee CFA [9]Fsinsight. Thomas J. Lee CFA |
 |
As we said above, the data doesn’t work on emotions. It paints a clear picture and as we enter this next month, no matter what happens we must maintain perspective. We must maintain discipline and continue to refine Your Financial Plan to ensure you feel that sense of opportunity and financial security. TheDHTInvestment Committee not only extended duration in July, we re-allocated funds to the US mid-cap category. Small-caps / mid-caps in a rate-cutting cycle have historically outperformed their large-cap counterparts. We see earnings potential among the Russell 2000 to be +43% year over year.[10]We also continue to utilizeDHTAnnual Dividend and VUSXX to provide cash reserves a low-risk environment to build dividends and interest over time. And, for those taking income and living out of assets on aDHTIncome Plan, we have already harvested another 10 months of gains to again provide increased stability long term. So, no matter the outcome, as always, we are strategically invested. And, as the future unfolds, we will continue to adapt, prepare, and overcome the challenges of tomorrow. Our focus on your plan ensures we invest for your goals and dreams. We invest to meet your income needs and we prepare those income sources, to weather the good times and the bad. Together we enter this next quarter and season of life with clear eyes and hopeful hearts! [10]Fsinsight. Thomas J. Lee CFA John C. Donohue, III CFP® Gregory B. Hart Michael J. Thomson Sr.MBA, CLU, ChFC, RHU, REBC Brooks D. Shertzer Office: 410-803-0160 Click Here to visit our New Website: www.dhtfg.com |
Q3 2024 Report: Doctor... What will the Voices in My Head Say After November 5th?
|
November 26, 2024