Quarterly Market Updates

Quarterly Market Update | October 2024

Oct 25, 2024

“The key to making money in stocks is not to get scared out of them.” – Peter Lynch

We hope you have enjoyed a wonderful end of summer and start to the fall season. If you’re a student of the markets, you’re probably aware that September has historically been the worst month of the year for stocks.[1] However, this year we saw the S&P 500 and Dow Jones setting several new all-time highs in September, gaining 2.14% and 1.96%, respectively.[2] The S&P 500’s 22.08% gain year-to-date is the best return through three quarters since 1997.[3]

A notable feature of the third quarter was the pickup in participation from other parts of the market. We’ve written, ad nauseam, how the “Magnificent 7[4]” cohort has been doing much of the heavy lifting for the past 18 months or so.

However, that all changed in the third quarter with the rest of the market (small-cap stocks and the remaining 493 stocks in the S&P 500) starting to carry their weight. The concern was that if the big stocks stop going up, the rest of the market will go down. That has proven NOT to be the case, with the Magnificent 7 taking a breather (in relative terms), allowing the rest of the 493 stocks in the S&P 500, along with small-cap stocks to play some catch up.[5] What we’re starting to see is a market that has moved on from being driven by large-cap technology, and is now broadening out – a very healthy sign for this bull market to continue.

While the third quarter finished on a high note, it wasn’t without turbulence. The quarter was packed with market-moving headlines: weakening employment, extreme spikes in volatility, shifts in market leadership, cooling inflation, a fed rate cut and the obligatory drama that comes in an election year. Yet, despite the turmoil, the market pullbacks we saw in early August and September were quickly bought, as the Fed’s half a percentage point cut fueled optimism that inflation has been contained without the economy entering a recession.

There was certainty in September that the Fed would cut rates. The uncertainty was whether they would cut by a quarter or a half percent. Up until the decision, it felt like a coinflip. On one hand, the economy has been humming along better than thought. The September release of second quarter Gross Domestic Product (GDP) showed 3% annualized growth and GDP data from the past five years was also revised substantially higher.[6] On the other hand, we saw the unemployment rate move up to 4.3% after July’s jobs report, suggesting that the softening in labor market conditions have gone beyond the amount that was welcome.[7] While it’s easy to get hung up on each little datapoint, the Fed is looking at things with a wider lens.

We’re open to the idea that economic growth could slow in the next several months. However, our base case does not include a recession. We see a US economy that slows to, or just above, its historical trend. The reason why the Fed is cutting rates matters. Historically the Fed cuts rates to help spark growth, and we’ve seen this many times in a decelerating economy with high recession risk. There have also been times when the Fed is simply recalibrating, and today is an example of the recalibration of monetary policy. Rates are high because the Fed had to kill inflation. Inflation has steadily trended down, with the Consumer Price Index (CPI) now at 2.5% versus roughly 9% in June of 2022.[8] In order for the Fed to take its vice-grip off the economy, they need to drop rates in line with the rate of inflation’s deceleration. Our view is that this recalibration is not driven by a fear that growth has stalled out, rather, it’s an adjustment to inflation dynamics.

We couldn’t finish this letter without touching on the upcoming Presidential Election. If the impact of the upcoming election makes you anxious when it comes to your finances, you’re not alone. Yes, there are significant differences in proposed policies, concepts and ideas from both parties, but to the market, it’s mostly noise.

To put it bluntly, letting political beliefs dictate an investment strategy has, historically, not been a money-making idea. There are too many variables to consider simply than who is sitting in the White House. Going back 70 years, $1,000 invested in the US 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 $61,800 today. 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 DC.[9] Allowing emotion and politics get in the way historically leads to poor results.

We wouldn’t be surprised to see stocks struggle in the leadup to the election, as that has been the historical pattern.[10] September through November is historically the weakest 3-month stretch for stocks in a Presidential Election Year.[11] While the S&P rallied in September, stock valuations are elevated and the home stretch leading up to elections heightens anxieties. On a positive note, stocks do tend to rally after the Presidential Election into the end of the year.

To summarize, we believe the backdrop for stocks remains positive. The US economy remains on solid footing as the Fed begins a rate-cutting cycle. Broadening participation in the market confirms that there’s more opportunity out there besides big technology. We remain mindful of what seem to be constant geopolitial risks across the globe. We’re also frustrated that neither Presidential candidate, or party, is willing to address our national debt. This is something that will have to be dealt with sooner rather than later.

As we close, we’d like to thank you, our clients, for your continued trust, partnership and support. As always, we’re here to answer any questions you may have. In the meantime, we wish you and your family a relaxing and peaceful holiday season.

 

Warmest regards,

Jack Piper
Founding Partner & Portfolio Manager

 

[1] Bespoke Investment Group September 3, 2024

[2] Y-Charts October 8, 2024

[3] Dorsey Wright October 1, 2024

[4] Magnificent 7 stocks are: Apple, Microsoft, Google, Amazon, Nvidia, Meta and Tesla

[5] Y-Charts October 10, 2024

[6] Bespoke Investment Group October 4, 2024

[7] Goldman Sachs August 2, 2024

[8] US Bureau of Labor Statistics September 11, 2024

[9] Bespoke Investment Group March 29, 2024. US stock market represented by the S&P 500

[10] Dynasty Financial Partners October 10, 2024

[11] Dynasty Financial Partners October 10, 2024

 

Disclosures

Great Diamond Partners, LLC is an investment adviser in Portland, Maine. Great Diamond Partners, LLC is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Great Diamond Partners, LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration. Great Diamond Partners, LLC’s current written disclosure brochure filed with the SEC which discusses among other things, Great Diamond Partners, LLC business practices, services, and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.

This information should not be considered investment advice. Opinions expressed reflect the judgment of the authors and are current opinions as of the date appearing in this material only. While every effort has been made to verify the information contained herein, we make no representation as to its accuracy and it should be regarded as a complete analysis of the subjects discussed. All investing involves risk, including the loss of some or all of your investment.

Past performance does not predict future results.

Any indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Investors cannot invest directly in an index. Comparisons to indexes have limitations because indexes have volatility and other material characteristics that may differ from a particular fund.

Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.