Jessica L. Gibbs, CFP® [00:00:52] Hey, everyone. Welcome back to Off the Wall. This is our recap of the markets and the economy in the third quarter of 2024. Dave is away today, but we do have the terrific members of Monument’s asset management team with us, Erin Hay and Nate Tonsager. So welcome, guys.
Erin M. Hay, CFA, CMT [00:01:08] Good morning. Good to be here.
Jessica L. Gibbs, CFP® [00:01:09] And I do want to note, before we kick things off, that we are recording this episode on October 3rd, 2024. Things may have changed by the time you listen to this. So let’s kick things off with a recap of the third quarter. What got your guys attention? Nate, I wanna start with you.
Nate W. Tonsager, CIPM [00:01:27] Yeah, I know Dave, he does a really comprehensive great breakdown, so I’ll try and fill the big shoes that he’s left. But when you look at Q3, to me, you know, it was a strong but a volatile quarter for equities around the world. And really when you kind of look at it just to kind of give some of that data to start to set the background for what we experienced in Q3 is looking at a few ETF. So starting with Vanguard’s total World Stock ETF, which is ticker VT was up 6.65% in the quarter. While if you focus on the U.S. markets or the S&P 500, that was up five seven five. So whether you looking at global equities, you know, international developed markets, emerging markets, both of those actually outperformed the U.S., which is why you see that VT return about the SPY or the S&P 500. But still a 5% return in Q3 when you have some kind of that negative seasonality or sometimes tough markets, especially in the month of September, really shows that it was a strong month, strong quarter, and that continues a strong year of 2024 for stocks overall. But when you look at the data and how we got there, you know, it didn’t go up in a straight line. And I think a lot of people understand that stocks come with swings up and down. We saw that in full force in Q3. You know, we had two separate sell offs in the first one began in kind of mid-July with some of those recession fears starting to get stoked up in the market. And basically through the start of August, we saw an 8% decline across basically global equity markets. So regardless of where you were domiciled, 8 percent sell off really made people, I think, kind of clench up a little bit and question about how strong the market really was. But we did see some recovery off that 8% decline, but that didn’t last that long. You know, if you look basically lend later in the quarter. So in the first week of September, we then had another 4% decline. So within that kind of move higher in the markets throughout Q3, you know, there was a lot of volatility that investors had to stomach and kind of sift through and hopefully you were able to rely on your financial plan, stick to your strategy, because if you didn’t panic at some of those downward moves, you were able to achieve some pretty good returns for the quarter. And maybe even more importantly, it’s kind of like I talked about global equity markets were all positive. Well, the breath underneath for the U.S. market was really strong as well. And I think a story in 2024 has been, you know, a narrow market focused on magnificent seven on tech names, but not in Q3. You know, Q3 saw broadening out in the market with the equal weight S&P 500, which is a little bit different than the S&P 500 you hear about in the financial media simply because the one that you read about most often or is more frequently reported is cap weighted, meaning the largest companies get the biggest weight and have the most impact. Well, if you look at the equal weight, S&P 500, as the name implies, each of those stocks gets an equal weight. It’s a better measure of the broad market overall on the average stock. Well, that was up nine, though, almost 9.5% in the quarter. So, again, significant outperformance versus the S&P 500. And that’s a really healthy sign to see because you saw a lot of the sectors that hadn’t been performing so well in 2024 really kind of catch a bit or start performing well in Q3. And specifically to call it the top three performing sectors for the quarter, utilities up 19.35%. The defensive, slow, boring utility companies were high flying really in Q3. Number two performer was real estate, up 17%, just over 17% and the third highest one then being industrials at about 11.5%. And when you look at kind of the broad market, you know, a good way to do that is through Invesco has an ETF ticker RSP. Well, those three sectors of utilities, real estate and industrials have a higher allocation in RSP than in the S&P 500. So really the outperformance we saw came from some of those sectors that, you know, maybe have more companies overall in the S&P 500, but don’t get the highest weights, I think. And then just to round out the top five performing sectors, you know, to call out financials and the discretionary sector both up over 10%. Again, a very strong equity market when you have five of the 11 sectors up over 10% in the quarter. I think then flipping it on to see what underperformed maybe is what had been performing so well. And specifically, I’m going to call out tech. So if you look at the tech sector, essentially flat for the quarter, technically it was down -0.03%. So a very small decline was in Q3. But and the only other negative sector being energy. So when you have kind of the largest parts of the market being essentially flat, but you see a broadening out underneath and those sectors that maybe aren’t as well reported on as well allocated to in the index level. It’s really a healthy thing for the markets. And finally, just kind of wrap up, you know, it talks a lot about stocks, but also talking about bonds. I think bonds have been a really interesting story of going back to 2022 when we saw them have a negative ten year, -10% return in calendar year 2022, followed by some strength in 2023 well Fed interest rates. And I’m sure we’ll talk a lot about that later, is, you know, allowing bond prices to appreciate as yields come down. So as interest rates move lower, I always want to remember that bond prices move higher. They have that inverse relationship. And Vanguard’s total world bonds, looking at fixed income markets across the globe, was up 4.6% in the quarter, which a little bit less than the S&P 500. But bonds are supposed to be kind of the steady eddy are not as quickly growing in a lot of markets. And really you saw strong performance. I think it’s really interesting and something I want to dive into maybe as we kind of get into the podcast here is most of that returned actually happened before the Fed cut their rates. So the market was kind of pricing in Fed rate cuts. And I think that’s a big distinction here is bond prices, yes, are linked to interest rates, but the interest rates are market environment as well, where investors are trying to predict the trend and making reactions to what they think will happen. And so that 4.6% return we saw in Vanguard’s total bond fund, almost all of it came before the Fed actually cut rates in mid to late September. So kind of an interesting quarter. It was really strong for kind of financial assets or markets in general.
Jessica L. Gibbs, CFP® [00:07:28] Erin, what caught your attention?
Erin M. Hay, CFA, CMT [00:07:29] Yeah, I don’t have anything necessarily earth shattering to add. I’m going to speak on I’ve got three topics here just sort of outlined breadth, which, by the way, I’m going to replace breadth in my vocabulary because I have a hard time saying I need a speech therapist. I’m going to start saying participation that’s way flows easier off the tongue for me. So participation, seasonality and sentiment. So talking about participate participation, Nate, you mentioned it. When we talk about RSP or equal weighted S&P versus SPY, which is cap weighted, it seems we talk about this every every podcast, whether it’s the Monthly or the quarterly. But we had some really great participation in the third quarter despite the early August freak out, which people are pretty much forgetting about already in. You know, we can never really tell exactly what caused everything, but I guess we’re talking that up to a freak out from the Japanese central bank and they had a surprise interest rate increase. But on participation in the quarter, this is a good stat, 328 stocks actually outperformed the S&P and only 109 were negative. So, Nate, that actually goes back to you talking about some of these other sectors that aren’t tech or communication services related and that feeding through to breadth and participation. So 328 stocks outperformed the S&P, the index itself. Ironically, the worst performing stock in the S&P 500 was a former Monument growth model constituent. Do either of you two want to take a guess of what that stock was? And how much it was down in the quarter.
Nate W. Tonsager, CIPM [00:08:58] I think it’s I think it was a tech name. And I was specifically, if I remember correctly, it was one that had been performing well. It was Supermicro conductors, right. I don’t know how much it was down, but.
Erin M. Hay, CFA, CMT [00:09:08] Yeah, Supermicro down close to 50% in the quarter. So just a noteworthy individual stock return in the quarter. They actually, by the way, and I’m going a little off topic, the Big Ten for one stock split here recently. So it’s interesting to see how these stocks, especially big tech stocks that have a huge run up, perform post-split. So that’s something that maybe pay attention to in the background. But but yeah, now you hit this, too. Yeah. Equal weight S&P. 9.5% versus cap weight, you know, up close to 6%. So breadth is really good. Hey look, I said it. Participation was really good in quarter. Seasonality. So I think you even mentioned seasonality as well. We’re sitting here October 3rd, just as you mentioned, October historically has been a bad a bad month in election years. But when you look at all year, it’s usually positive. So, you know, for this reason, I’m not really a huge fan of seasonality. People like to talk about it. I guess it sets the stage or some context, but you give me enough time and data like I can basically data mine any narrative you want out of seasonality. I’d much rather look at current price trends and data and to that end, at the end of September. So as of 930, 81% of global stock markets are above their 200 day moving average to the longer term average and 83% are above the shorter term 50 day moving average. And when you actually go look at the U.S., which of course has the greatest weight and, you know, world stock indices, particularly the ones that are cap weighted, 78% of the S&P 500 constituents above their 276% above their 50. So you’ve got pretty strong internal trends in the S&P 500. And a last seasonality trend for you. It’s not really seasonality, but it’s noteworthy stat. The S&P is up eight of nine months this year, which is pretty it’s not unheard of. It’s happened seven other times. But each time it’s happened, it’s been bullish for the fourth quarter going into January of the following year. So I think, you know, given that data, given the the the participation and the the moving average that’s represented, I think the market’s on pretty solid footing here. And then lastly, I do think it’s important to talk about sentiment in the market. I think there’s a lot of what we’ll call headline risk right now. I mean, there always is. But here, especially in an election year, you’ve got geopolitical tensions in the Middle East, which we’re not even going to begin to to go into that. We’ve got the dockworker strike, which. More on this later. I’m. I am I was expecting be this fired up about that topic. But that’s I think that’s a huge headline risk right now. And then you’ve obviously got the November elections and these all tie together, I think with all three of those topics. It’s a perfect recipe for a continued wall of worry rally. You’re going to start to get incoming phone calls from from friends, from relatives on you know, what to do with them with their stock portfolio, you know. Should we wait until after the election or I’m really nervous. The market’s about to crash again. I think based off of what what the market is telling us from a trend perspective and from an internal perspective and given some of these really big sentiment overhangs, I think it’s the perfect recipe for a really strong fourth quarter.
Nate W. Tonsager, CIPM [00:12:12] Yeah, I think that’s a really well said. I think the times I get most scared as an investment manager’s when no one’s talking about what could go wrong. It’s when everyone’s just sitting back and saying the world is great like that. While reporting is really healthy for the markets and the data, you got to look at it in the context of the economic data in the market data as well. If the economic and market data is bad, that while the worry can be a bad thing, but when you have a lot of the positive data that we’ve seen so far, a wall of worry is just kind of healthy skepticism about the future that hopefully prevents maybe bubbles or over excessive moves to happen in the market. So while they’re not fun topics to talk about, they are really important from a market standpoint to have those kind of narratives out there.
Jessica L. Gibbs, CFP® [00:12:57] All right. Well, I do want to circle back to some of those things you mentioned there, Erin. But I think the Fed cut rate, fed cutting rates was obviously a really big storyline in the third quarter. So, I want to spend some time talking about that. What are your guys takeaways or what do you think are some of the possible impacts from the Fed’s decision to cut rates by 0.5%?
Nate W. Tonsager, CIPM [00:13:19] You know, I think personally, I was surprised that the Fed decided on a what they called a jumbo cut of 50 basis points instead of the standard cut of just 25. So, I mean, I definitely agree that we had enough data to support the Fed cutting rates, but for the Fed to kind of double up and do two cuts right off the bat, that definitely caught me by surprise. I know I wrote about it earlier and I wrote about it on LinkedIn earlier in the week before the Fed actually cut rates that I really didn’t think a 50 was possible. But if you looked at what the market implied probabilities for saying, I mean, the market expected 50 basis points. So that’s good for the market market always likes to get what it expected as do we all. But I don’t think the economic data was bad enough, quote unquote, just to have the Fed kind of, you know, load up on a on a double rate cut here with 50 basis points. Now, I’ll happily take it because, again, I think lower rates at the margins are going to be a good thing for the economy. We definitely are, we’re at a restrictive policy and I think we do have the ability to start peeling back. And the reason is really when you look at the underlying data and the two points that the Fed is very focused on in their dual mandate is the inflation measures. So price stability. And a full labor market are full employment. So, you know, looking at inflation, you know, we’re still seeing signs of inflation coming down slowly but surely. So year over year CPI, when you look at the data metric at the end of August is at 2.5%. And we haven’t had a reading that low since the spring of 2021 when we were on the increase in inflation. So we were coming up through 2.5 on our way to 9% in the end. So we’ve kind of gone up over that crest and started to come back down sort of within the past three years, we have not seen inflation at this level. And when you even go back farther in time and kind of look at what is the average CPI and inflation measure, the consumer price index, the year over the average year over year level for CPI when you go from 1990 through 2019. So what is that, 29 years? Is 2.46. So what we’re really at is back to average inflation for what we had over a 29 year period. That’s really good news that, you know, the Fed does have the ability to start cutting rates and can do some kind of mission accomplished narrative around battling inflation. But I think when you look at what the inflation is really coming from still and why it is above their target of 2% is really because of shelter inflation. And shelter inflation is something that I’m going to be keenly watching as we go forward because it makes up a third of that CPI measure. So 33% of that CPI comes from what shelter inflation is, and shelter inflation is still above pre-pandemic levels. And the Fed even mentioned in their press conference that that is not something that the Fed is going to be able to really fix, because why we’re seeing such high shelter inflation or housing prices going up is the lack of supply. And the Fed can’t build more houses. They can cut rates to maybe stimulate more demand in the housing market. But what we really need to fix kind of shelter inflation or help get that under control is more supply. And so that’s going to be a longer term story. You know, houses aren’t built overnight. I believe the average time it takes to complete a multifamily apartment complex or condo or something with multiple units is about ten months, which is low historically. But that’s still ten months of time before that housing supply kind of hits the market. And really, that’s going to if we have shelter inflation, that’s going to keep that core CPI measure. And so what core does is it moves food and energy prices, which can swing based on various dynamics. You know, we talked a little bit about geopolitics. If there’s escalation, further escalation in the Middle East, you could see energy prices skyrocket, pushing headline inflation up, which is why the core CPI is the measure I really like to focus on. Well, that core measure, which strips out those volatile categories, is that 3.2%, so significantly above where the Fed’s target is and above headline inflation. And a lot of that is just because of the shelter, the housing component. So while we’ve seen some pullbacks and inflation, there’s still some data out there that would have led me to believe that, hey, maybe just taking a little bit off the top on that 25 basis cut is all we needed versus the 50 that they did. But one of the main reasons they did a 50 basis point cut, when you look at all their comments was they thought they wanted to support the labor market. And I think if anyone’s out there looking for a job or looking at the data, hiring in general, you know, the labor market has cooled, but it hasn’t really fallen apart or collapsed yet. You know, unemployment rate is at 4.2%, which is the highest in almost three years. So while inflation is, you know, back to levels we saw three years ago, unemployment has risen to the levels we saw in November of 2021 when we were coming down from some of that Covid spike, the pandemic spike that really jacked up unemployment rates. But when you look at what is why that’s happening, why the unemployment rate is at 4.2 and sticking, you know, I think it’s really important to call out that initial jobless claims are coming down. So people filing for unemployment insurance, those numbers are coming down. Layoffs are coming down overall and quit rates are coming down. So you have companies aren’t laying off workers. People aren’t changing jobs because they’re not confident that they can find another job. So simply an overall initial jobless claims are coming down. That doesn’t really show a deterioration, I would say, or a collapse in the market where people are losing jobs, don’t have an income anymore. It really just shows that I think people are being responsible with their hiring. They’re not laying off people because they know they need them and they’re not excessively hiring people because it is a tough market out there. The economy is slowing. And I think that gives me confidence that the unemployment rate isn’t going to rise much higher. And if people have jobs, it’s really hard for me to see a recession overall in the market. You know, I think kind of looking at the last piece of the jobs market is really when you look at the total jobs being created and that’s the non-farm jobs payroll. It’s been a little bit low over the past three months, over the past quarter. But if you look at the year to date kind of average with all the months, it’s right around 200,000 jobs per month. And that’s a key level for economists at least. And what I have been trained on is that we need about 200,000 jobs per month to kind of keep the labor market balanced with up and keep up with the growth in the working age population. So, and really, I think you’re seeing that also, too, in job openings is the final data point here. And the Bureau of Labor Statistics looks at how many job openings are there for all the unemployed people that are on, you know, that are being claimed as unemployed. And right now, there is 1.1 available jobs for everyone who’s looking. Now, there skills mismatch, there’s location mismatch. So, it’s not as simple as saying, great, everyone could get a job if they wanted to. But really what that shows is a better-balanced market and why you saw I think a lot of the imbalance was at the peaks over the kind of Covid disruptions. There are nearly two jobs available for every unemployed person. So job openings have come down significantly as companies kind of take the responsible stance of, hey, we’re not going to grow headcount if we’re not confident that we’re going to be able to grow as quickly as we were in the past. So all that is really pointing to a balancing of the labor market, not a falling out within the labor market, which again, the Fed said they wanted to support the labor market with that 50 basis point cut, and it definitely will. But they maybe didn’t need to, in my opinion. So that was kind of my take on it. And I know I’m talking a lot about it. But I mean, kind of I think the second question is maybe more important is, you know, the Fed took these actions, but what’s the impact? Just why does it matter to investors, to everyone who’s out there? And I think there’s two key components to it is what’s going to happen with the interest you earn on your savings or on your cash and what’s going to happen with the debt and the lending rates that you’re going to be, you know, seeing out in the market. So starting with the cash component, I think, you know, depends on where you’re kind of investing your cash. But really cash is linked to short term rates, which the Fed has a lot of impact on. Meaning a Fed cut is going to bring down some of those yields you’ve been seeing on short term deposits or money market mutual funds. I think a good example is Schwab’s government money market mutual fund was yielding around 5% after the pre Fed meeting. But after the Fed, if you look at it today, it’s much closer to 4.5. So you saw within weeks a very quick adjustment to what the Fed cuts are happening. Now 4.5% is still a great rate to keep on cash historically. And, you know, for a long time it was zero. But as the Fed continues to cut further, you got to pay attention to those kind of things? Hey, what is my cash actually going to be yielding and do I need to take actions to maybe lock in rates now if I can and give up some liquidity or just accept that I’m going to maybe be earning a little bit less of my cash in the future. On the flip side of that coin, you know, if you’re borrowing money, so what’s going to happen with lending rates? Well, all lending rates are made up of two key components. And the first component, there is an established benchmark rate and then a spread sent by the lenders, the second one there. And while the spread usually remains constant over time, the benchmark rate can fluctuate. And the benchmark rate can be, you know, a variety of things. It can be the Fed funds rate, it can be other interest rates in the economy or even a U.S. Treasury rate. And I think when those changes happen in your benchmark rate, that’s when you’re going to see the impact on your variable rate debt, like your credit cards, lines of credit and margin loans. But you need to know exactly what your benchmark rate is. If your benchmark rate, like I mentioned, is the federal funds rate, well then you should see an adjustment based on their actions to have a lower lending rate. However, a lot of benchmark rates are and I shouldn’t say a lot of, but a good portion of benchmark rates aren’t necessarily just Fed rates or as simple as that. They’re linked to other markets. And specifically, you know, the U.S. Treasury market is a big one. And that’s and I’ll use an example here of mortgages. So U.S. Treasuries aren’t react. They do react to the Fed rate cuts, but more importantly, they’re traded in the open market all the time, meaning the moves are more based on anticipated shifts in the yield and market speculation about what’s going to happen to the future trends. And, you know, I think the best way to do it is by an example. So if you look at a ten year Treasury yield, the ten year Treasury yield has fallen by 75 basis points from July 1st to September 20th. So all of that happened. The Fed cut, as you saw, 75 point draws a 0.75% drop in the ten year Treasury rate. And over that same period, the 30 year mortgage rate, which is linked to those U.S. treasuries, dropped by about 86 basis points or 0.86%. Again, all of that happened before the Fed actually cut rates. You don’t need to have Fed rate cuts to get lower borrowing rates in all markets. It depends on what your benchmark rate is. So as we kind of look forward about what could happen is if the market is looking for more Fed cuts, lower rates overall, even before the Fed actually goes through with these cuts, you might see mortgage rates, other lending rates start coming down. And it may not be an exact one for one with the Fed cuts overall. I think if I look at the markets today, they’re implying that the Fed is going to cut another 1.75% by mid 2025. But I it’s tough to predict exactly where mortgage rates are going to end up given those market dynamics of the swings. If the Fed starts looking like they can’t cut, you might see mortgage rates move higher. If the Fed doesn’t cut as much as the market’s expecting, mortgage rates could move higher. So you could see an environment where the Fed’s cutting, but mortgage rates are still rising. If the market isn’t aligned with the Fed overall, you know, if you had to press me on where I think kind of mortgage rates might end up, I think within the next year or so, you could see them around 5%. So the 30 year mortgage around 5%, which is 1% lower from here. That’ll make a difference in the housing market and make a difference for people, some refinancing activity. But I think the bigger point here is I don’t think you’re going to see the 3% rates we saw at the lowest end there. And really, this Fed cut shouldn’t be seen as a pivot to low interest rate policy, but more as a kind of I think the Fed, where they’re using is recalibration to what the new market is. So marginally lower rates, but not, I think, 0% interest rates, low interest, ultra low interest rates are really a thing of the past at this point.
Jessica L. Gibbs, CFP® [00:25:18] Because, you know, for those who have been sitting on the sidelines either in sell their house or buy one themselves. So, Erin, what do you have to add?
Erin M. Hay, CFA, CMT [00:25:27] I think if it’s not clear by now, Nate is our resident Fed watcher and economics guy. So I don’t I actually don’t have a whole lot to add. The few things I will say about rate cuts, inflation, you know, these topics, I think it’s the Fed’s gotten himself in the middle of it. I think it’s a doozy here that they’ve cut a half a percent into this port strike, which I know you’re like, what is this port strike really a big deal? Actually. I don’t know. But if you look at this, besides the scope of of what’s going on on the eastern seaboard all the way down through the Gulf, it’s huge. And I I’m still trying to figure out and not necessarily for how we manage the portfolios. Just as a personal curiosity, I can make a case this is either inflationary or deflationary. It could go either way. It could be a nothing burger. But I do think it’s a story and something to continue to keep an eye on. You know, Nate, you talked about hiring trends and job openings, you know, going from like 2 to 1.1 for every, you know, job that’s out there now and companies, you know, pulling back. I think that’s interesting, too, from the standpoint of everyone’s talking about if we’re in a recession and what’s the big data point or phenomenon that people talk about with regard to recessions? It’s the yield curve inversion, which we first got that back in 2022, and then everyone said, we’re going to get a recession. That’s going to be terrible. And then we went through something like 480 days, you know, of of an inverted yield curve with no recession. And then now you’ve got people saying, well, wait a minute, the yield curve is an inverted now, and that’s the harbinger of recession. So I think I tend to to discount those data points because I think there’s a tremendous amount of what you call like reflexivity or observer effect with that. And this goes to your point, Nate, of companies scaling back is if you if if every participant knows what’s the harbinger of of a recession. Right. What are people going to do if like my gosh the yield curve is invert is inverted, companies are probably going to be, you know, adjusting for that. So it’s almost sort of a self-correcting mechanism. If everyone knows the rules of the game and sees these rules taking place in real time, like how does that affect their behavior? So that’s my kind of wonky way of saying that I think we’re probably going to stave off a recession for the the short term. But again, going back to this port strike, I have no idea how big of an impact it’s going to have. Last thing I’ll add in, I, I wrote a LinkedIn piece here in the last couple of weeks right before the Federal Reserve came out and cut rates a half a percent. There [9.9s] was a really good graphic from Goldman Sachs that looked at how stocks performed going into the the first rate cut of a rate cut cycle. And it goes one of two ways. And it’s all depending on if we’re in a recession or not. And their data shows that if we’re in a recession, stocks are usually down between 15 to 20% for not in a recession. It shows stocks going up over the short to intermediate term, 10 to 17%. So, again, I don’t know that we’re necessarily in a recession based off of that reflexivity behavior that I talked about. Everyone knows the yield curve inverting is a bad thing and so people are going to self-correct. But again, look, it’s data here, too, and I’m going to bring this back to price trends. And Nate talked about fundamentally what’s going on with the Federal Reserve. But I actually want to look to see what price trends in the bond markets are telling us. And so Goldman says if we’re in a recession, stocks down 15 to 20% after the first rate cut. If we’re not, stocks up 10 to 17%. It’s just it’s kind of a small sample size, but that’s what we have to work off of, I would say based off of high yield bonds and bond prices. And this goes back to my LinkedIn post you’ve seen. Muted spreads. So the spread U.S. government bonds and high yield and you’ve got a clear uptrend in prices. And RSI, by the way. RSI is just a measure of how strong up moves are in bond prices in the bond market. So you can obviously get a non recessionary bear market like we saw in 2022. But I think the market’s telling you right now, most right now that we’re probably not in a recession. And going back to all of the data we presented with what’s going on in both stocks and bonds. I think we’re on pretty good footing here.
Jessica L. Gibbs, CFP® [00:30:29] You guys are making some really reassuring comments as far as not in a recession. The market’s in a positive place and it likely will continue in the fourth quarter. So yeah, this is a very reassuring podcast from the two of you. So let’s go to something less reassuring. You touched on earlier geopolitics. So obviously there’s a lot going on right now in the world geopolitically. But Erin, I know you wanted to touch on China specifically.
Erin M. Hay, CFA, CMT [00:30:58] Yeah. So it’s not necessarily so much, you know, geopolitics here as just looking at capital markets outside the U.S.. And I think China’s really interesting right now. And for those who haven’t been paying attention, China’s basically thrown the kitchen sink at their capital markets in response to a basically any data point you can find in China. It’s been horrific, but I picked out three here. Consumer confidence, property prices and foreign direct investment have just here recently have been terrible. And so I actually saw a a good thesis on this and I think kind of boils down to its simplest elements. I actually think the Chinese government, the Communist Party over there, had this plan all along, but they weren’t stupid enough to do it when the U.S. was raising interest rates. I think they’ve wanted to do this for a long time. But I’ve seen some writing that basically said if they would have done this while we were in the midst of increasing rates and of course, we just we’re we’re cutting rates now. But if they would have done this while the U.S. has been increasing rates, it’s akin to pissing into the wind. It would wouldn’t have any benefit whatsoever. But yeah, so the Chinese government’s basically throwing the kitchen sink there. They’re messing with interest rates, reserve requirements down payments for not first homes, second homes, which is crazy. And direct cash payments to people. So they’re they’re doing anything and everything they can to basically create inflation, which we saw that worked out here in the U.S.. So, you know, stay tuned. But yeah, last Tuesday was the best day for Chinese stocks since the great financial crisis. I think the big, bigger picture, though, is despite all these headlines you’re seeing, and especially if you watch CNBC, you see these hedge fund managers saying going all in on China right now. Not everyone, but you’ve got David Tepper of Apple. You say Michael Burry, who’s, you know, famous in The Big Short. Their portfolios are, you know, if you believe them, are pretty concentrated in China and Chinese equities right now. You know they’re going all in on it. I think the bigger picture here is there’s been a decade’s plus of underperformance versus U.S. markets, and that trend has a long ways to go before it reverses itself. I think this is probably short term more of a quote unquote trade than it is necessarily an actionable trend. But we’ll see how it plays out. And I say the important thing because there’s probably clients listening to this. For clients I’d say this if and when we participate, we’d rather be late and right than early and wrong. So kind of stay put. Stay tuned. We’ll monitor this situation, but it’s definitely an interesting development.
Nate W. Tonsager, CIPM [00:33:33] Yeah, I tend to agree a lot with what Erin said there. And I think it’s a big interesting story because you hear a lot about capitalistic markets or cap capitalism, let’s call it. But communism is a weird beast in a way. And I don’t and I don’t want this to come out wrong. But there are there is benefits to communism in an economic system, not as a political one, not from biological.
Erin M. Hay, CFA, CMT [00:33:53] I want to get a sense I want to get a sound drop that says benefits to communism. We’re going to blast that out. I’m put now I’m just you know.
Nate W. Tonsager, CIPM [00:34:01] I know it’s the millennial in me right now. I’m just kidding. But the the benefit there is you don’t need to have build a consensus when it comes to these sweeping, significant policy and agenda items. And, you know, discourse is really a benefit of capitalism and being able to balance it. Well, communism means you can wake up one day and you can completely flip your marketing, flip the narrative by like, as Erin said, throwing the kitchen sink at everything. But there’s no debate about whether that’s right or wrong. And I think Erin brought up a good point that a lot of these actions could have consequences, especially in inflation down the road. But really, when you can wake up one morning and just flip the narrative in your economy, you can get some benefits in the short term from that long term, very different story. So there you go. There’s the downside of communism. Is it short term? It might be an easy fix, but long term, I don’t know if it’s the right decision at. All. But really, I think the best example there is you saw the Chinese stock market go from a 52 week low to a 52 week high in two weeks, in two weeks, all because of these policy actions. And as Erin said, they did everything. They were even giving money to stockbrokers, to people to buy Chinese equities and just push up their stock market. So you can take a lot of these actions that are very, I think, detrimental in the long term. You can do them overnight and you can force them to happen regardless of what the discourse says or the diversity of opinions. So there’s the one benefit. But really, I don’t think the actions they took actually will help prepare them long term. You know, I think if you look at what they did, they just pumped a lot of money in the system and they tried to spur demand versus trying to fix bad loans that they have really overall in the property market. You know, in 2008, with the great financial crisis, you know, the global financial crisis, a lot of it was because bad loans were made on homes that went underwater. Well, while you haven’t seen that across the globe this time, if you look at China specifically, that’s a lot of their problem. A lot of their problem is they had made really bad loans and they aggressively grew their property market without taking appropriate risk, manage, measure. Again, the communist agenda was to push forward and the property market regardless of what the consequences could be. And now I think you’re seeing some of those consequences of just going full boar into one one sector, one kind of area there. But really, if you want to see the long term trend in China, I think turn around and maybe see more kind of growth over in repairing of that balance sheet. That means the government’s going to have to assume these bad loans. And that’s going to hurt the overall profitability, quote unquote, of the Chinese party and government because they’re going to have to state statewide, come in and take these bad loans off the property developer books and kind of eat the losses that are there. So while you can do some of these actions to prop up your market in the long term, a lot of those actions are taking now seem very short minded, very focused on, hey, let’s get a short term trend and change the narrative in the stock market overall versus let’s actually repair the economy and see what’s going on underneath. So it’s kind of an interesting tactic. It’s very different than I think you would see from a capitalist country and capitalist markets. But in the short term, you can’t deny that they did have a benefit from flipping their market again from that 52 week low to a 52 week high in two weeks. That is absurd kind of change in narrative and in performance. So it’s an interesting story. And I think Erin put it really well. Hey, the trend is still lower when you look at the longer term trend. Short term, it has shifted. And speaking kind of how we invest here at Monument, he really is about identifying noticeable prevailing trends in the market and latching on to them. So we’re going to keep an eye on it. It’s something that we do want to watch. Overall, of course, we look at the global equity markets here. We’re not just strictly focused on the U.S., but it is kind of an interesting story that happened in that the very end of Q3 here.
Jessica L. Gibbs, CFP® [00:37:41] Well, good stuff. All right. I want to I want to start wrapping up. So it’s been a good conversation. You know, this year, as long time listeners will know, we’ve been ending our quarterly market recap episodes with a quick rundown on what we’re feeling pessimistic and optimistic about. So Erin, I want to start with you. What are you feeling pessimistic and optimistic about?
Erin M. Hay, CFA, CMT [00:38:05] All right. I need to sit up in my chair for this.
Jessica L. Gibbs, CFP® [00:38:09] Listeners take note. Okay, here we go.
Erin M. Hay, CFA, CMT [00:38:14] I may end up ruffling a few feathers for this. I don’t know. Anytime you talk about unions and organized labor, it’s. It tends to be a political issue. When. What I’m getting ready to say and discuss isn’t it’s an economic issue. But I’m going to meld my my pessimism and optimism into the same topic. And if you’ve been listening so far, I think you can guess what it is. It’s the International Longshoreman Association strike. And I’m short term pessimistic about this for some of the reasons we talked about. I don’t know the scope and scale of this. So it’s affecting the entire East Coast. It’s affecting the Gulf. I don’t know if it’s going to end up being inflationary or deflationary. I could paint a picture for either I’m short term pessimistic because I don’t think anyone with the election coming up is going to have, quite frankly, the balls to f with a large and influential union. And basically what’s happening here, if you haven’t been following along, is the ILA is rejecting modernity in order to preserve their jobs. And this is an [00:39:19]excerpt and I wrote this on LinkedIn, too. But this came from [2.2s] a pretty big ally president. He goes, As everyone has heard by now, my boss is taking a hard stand on the never ending threat of automation that is infiltrating our industry. And I have heard that the remarks from those that say we need to learn to deal with it. Well, I have a message for those people. Kiss my fat ass with ass and two dollar signs, by the way. That’s. That’s how I would write on it.
Jessica L. Gibbs, CFP® [00:39:44] To make an accurate to make sure the quote is accurate.
Erin M. Hay, CFA, CMT [00:39:47] Yeah. Yeah. So the whole rejecting of automation is I mean, it’s a tail is all this time. Ironically, I’m going to go back and I’m going to tie this back to China. I’m going to have some China friendly comments right here. From the reading that I’ve done here recently. You know, China has multiple ports. So, like it’s singularly multiple ports right now that are capable of processing more throughput than the entire U.S. port system combined. So that’s just anecdotally showing how bad our ports and our infrastructure are. And so we do this to ourselves, you know, based off of how the union operates. And they want to they want to get paid every time they touch a shipping container. And in order to avoid this, we basically use hugely inefficient and destructive means of transporting goods. And so here’s a here’s an excerpt from something I read this week. It goes so it’s somehow cheaper to truck containers hundreds of miles and let taxpayers foot the road repair bill than to let the union touch it two more times for short sea shipping work. So again, it’s the same thing we’ve seen. You can paint this picture for everything for horses and cars, for bank tellers, for elevator operators. It’s it’s again, a tale as old as time. And like, what’s the point of this? Is the point, too, to preserve jobs or is the point to build wealth in the country? And so, this is a this is a Peter Griffin. This really grinds my gears type of type of thing. So that short term pessimistic on that I’m long term optimistic that this is going to get fixed. In the same manner that we have successfully, you know, implemented automation in other industries. Namely, we just talked about ATMs, elevators. There used to be an elevator operators union, but I didn’t know that until, you know, here recently. But back in the early 1900s, there absolutely was. So we’re going to get it fixed. And some of the studies I’ve seen that once we do pull our heads out of our asses and do fix this, there are some studies that have shown that when ports expand capacity by just one ship, that port sees a 42% increase in trade volume and meaningfully less congestion. So I think if we can get our infrastructure figured out and starting here with the ports and this will obviously take some years, I think there are some huge economic tailwinds here in the country. Again, not just short term but longer term. So I think that could hopefully potentially put some downward pressure on inflation over the long term. But as we talked about short term, that could end up being an inflationary pressure. I don’t know. That’s my rant. Stepping off the soapbox, short term, pessimistic about the ILA strike long term optimistic. We’re going to get it figured out and we’re going to get the ports automated. I yield the floor.
Jessica L. Gibbs, CFP® [00:42:33] There you go.
Nate W. Tonsager, CIPM [00:42:34] Well said.
Jessica L. Gibbs, CFP® [00:42:36] All right, Nate, what about you?
Nate W. Tonsager, CIPM [00:42:37] So with this all tag on a little bit. But I think my starting with my pessimistic and maybe that’s not what I’m pessimistic about, but maybe what I’m nervous about is there’s a lot of events out there that could make inflation a little bit more sticky. I think this strike is one of them that could have an impact on inflation. And there’s other ones, like I mentioned, with the shelter inflation as well. And if inflation is sticky and doesn’t continue to come down, the Fed won’t be able to cut interest rates as significantly as the markets are implying. And when you look kind of lean back on that macroeconomic background that I like so much and using that economics degree is, you know, if you look at the market implied probabilities, they have the Fed getting to a 3% target rate at the low end by mid-next year, by June of 2025. And just when I look at the data that seems really aggressive to me, unless we are in a recession, you know, if we are in a recession, then the Fed is going to cut and they’re going to cut quickly. But as we’ve kind of laid out, then his optimistic, hopefully reassuring podcast is I don’t think we’re likely going to see a recession in the short term. And I’ll touch on that maybe in my optimistic points here in a little bit. But I think if we don’t have lower interest rates and we continue this higher for longer, it’s going to be viewed negatively by the market. But it doesn’t have to be actually a bad thing, which is why I don’t want to sound pessimistic about that. The Fed can’t cut rates because there are benefits to that. You know, we talked about it for retirees or people who have accumulated wealth. Higher rates means that your savings and other low risk cash like investments can continue to earn those higher interest rates. You know, and that really supports the cash based financial planning we do at Monument is setting cash aside to remove some of that volatility in your financial life by having what you need on the sidelines. And now it will be continually earning that competitive rate. So really there’s the benefit there to savers. And, you know, I think if you’re also looking we deal a lot with business owners here at Monument. You know, we’ve heard from business owners that are looking to exit or pursuing liquidity events that, you know, higher rates does actually lower the business valuations. It’s just the math of how it all works. And lower business valuations can be a tough thing for kind of business owners to swallow because you had this dream of exiting at this multiple and now you’re here. But if that is delaying your exit, that doesn’t also have to be a bad thing, because what that does is it gives you more time to diversify your wealth today and take steps to make your eventual exit more tax efficient. You know, the best planning happens well in advance. And if you have more time before your exit now just because interest rates are higher, that’s an opportunity. You should hopefully view it as an opportunity to make some impact to when you do exit to make it more tax efficient and diversify your wealth out today to hopefully kind of build up for that eventual exit. So not pessimistic, maybe just more nervous that inflation won’t come down enough where feds can lower rates. But don’t take that as a necessary bad thing depending on what kind of bucket you’re falling in. There are benefits to higher rates as well. So kind of then pivoting then to what I’m optimistic about and why I don’t think we’re on a recession is the U.S. GDP growth. You know, GDP is a tough thing to measure. It gets revised frequently and even years later, they go back and make revisions. And recently we had one of those that I went back, I believe, over a five year period to look at kind of what revisions do we need to make to GDP. And overall, over the past five years, GDP has rose. They sorry, they revised it higher to 2.5% per year annualized from the end of 2019 through midyear of 2024. And that was compared to a 2.2 estimate before. So, again, a significant revision higher. And when you look at kind of where it all came from, you know, I think it’s important to call out that one of the big things that was revised higher were corporate profits. Corporate profits were revised up 11% roughly on a pretax basis. And so what that really shows is, you know, a healthy kind of business environment that is leading to that GDP growth. And that 11% revision was in the Q2 of 2024 overall. And, you know, Q2, which we just experienced recently. So I know we’re talking about Q3, but if you look back on quarter GDP growth was revised up to 3% in that quarter, which is a very strong reading. And a lot of these revisions, they happened because output was even stronger than expected. But there was no change to the hours worked in the economy. So what that really means is the economy was more productive than what we had even thought. And we thought it was a pretty productive economy with benefits from the AI boom and other kind of, I would say, efficiency measures that you were seeing. And GDP growth over the long term is driven by two major factors population and productivity. And we’re seeing better productivity than we had before. And anecdotally, maybe it’s just the phase of life I’m in, but there’s a lot of population growth. I think that is happening overall. I think and I don’t have a lot of data to support it yet, but I think we are in the midst of starting to see a baby boom 2.0 where millennials and Covid overall have been delaying household formations. And now that people are forming households. The next logical step is to grow their household. So if we have better productivity and we’re seeing better population growth, I think overall from housework formations, you have the potential for some really strong U.S. GDP growth into the future.
Erin M. Hay, CFA, CMT [00:47:45] I’ve got an idea how we can supercharge that productivity growth. Guess what they’re gonna say. Automate the ports.
Nate W. Tonsager, CIPM [00:47:52] Yep, exactly.
Jessica L. Gibbs, CFP® [00:47:54] Back to automation.
Nate W. Tonsager, CIPM [00:47:55] Yeah but no, it is it is a great point though. It is. A lot of what we can do is be a more efficient economy through the benefits of AI, through technology. And really A.I. isn’t going to replace, I think, a significant amount of jobs. It’s just going to make those jobs more productive. So to get on Erin’s soapbox, I think a lot of this fear of automation is going to steal jobs here and there. Yeah, they’re going to take away some jobs, but really what it’s going to do is make you more productive. And AI is really a tool that people should be using to make their lives easier, not replace aspects of their life. So I think we’ll see that shift overall and hopefully the strike component can get over that bridge there.
Jessica L. Gibbs, CFP® [00:48:33] All right. Well, obviously, one of the things we did not talk about in depth in this episode is the upcoming U.S. election. If you do want to do a deeper dive into predictions about what might happen, I suggest you check out our previous episode with economist Bob Stein. And we also talked about tips for investing during election year. In our midyear market recap episode, which was published in July. But I’m going to bottom line it for you. Here we go. This is Monument’s take. Trying to adjust your investment strategy in anticipation of pre or post-election market swings can be risky and likely counterproductive. It’s been proven that staying invested over time. We’ve talked about this a lot has it’s just a way higher chance of yielding the results that you’re seeking versus trying to guess what the outcome of the election is going to be. So if you have a good portfolio, your best odds are to do nothing. If you don’t have a good portfolio. Fix that. So if you’re a business owner, executive of a wealthy family and you’re not getting this type of unfiltered opinions and straightforward advice that you need, reach out to us at Monument or subscribe to our no nonsense Monument unfiltered newsletter. The link is in our show notes. So thank you, everyone, for listening. And thank you, Erin and Nate, as always, for your commentary.
