2024 Q3 Market Commentary

Maybe it is just a personality trait, but I am most nervous when everything seems to be going great. When the Georgia Bulldogs are playing well, I keep waiting for the big, season-ending injury to a key player. When the weather has been beautiful all week, I assume it will rain all weekend. The current market gives me that same sense of trepidation. It seems everything is working right now. The Standard and Poor’s 500 (the S&P 500) is up around 22% this year through the third quarter.^[1] Fixed income is up over 4.50% as measured by the Bloomberg U.S. Aggregate Bond Index (the Agg).^[2] Even cash is still paying nearly 5%. So why would I be worried? Here are a few reasons.

• Change – Politically, change is coming. We will have a new President as well as new members of the House and Senate. Change can pave way for opportunities, but it also creates uncertainty. Generally, markets do not like uncertainty.
• Foreign conflicts – There are already several broad regional conflicts, including the Russia-Ukraine War, a civil war in Sudan, and escalating wars in the Middle East, to name just a few. While the United States’ involvement in some of these conflicts is currently limited to providing economic aid, there is a chance that involvement may evolve. These factors alone are enough to cause concern, but what happens, for example, if China decides to invade Taiwan?
• Profit taking – Equities have been on a solid run for the last two years. The S&P 500 is up approximately 63% since the low of October 2022.¹ There will be a point in time where investors wish to realize some of these gains. When this happens, the selling can occur quickly and seemingly out of nowhere.
• Inflation/Interest rates – I put these two together because they go hand in hand. It feels, at least to me, the market is pricing in perfection from the Federal Reserve (the Fed). Meaning, inflation continues downward towards the Fed’s goal of 2%, and they can then cut the federal funds by another 1.5% – 2.0% over the next 18 months. What if inflation stops going down, or even worse, goes up? That could be a shock to the markets.
• Debt – It is no secret that we are $35 trillion in debt (and growing).^[3]  This has not been a problem for the markets – yet. We are not far off from a scenario in which the interest on the debt is the single biggest line item in the U.S. budget. My biggest concern is that we are going through another presidential election where the national deficit is barely mentioned by the candidates.
• Artificial Intelligence (AI) is not all it’s cracked up to be – While it is unlikely to be the case, what if companies decide AI is not a worthwhile expenditure and cut back on AI investments? Much of the current market appreciation is attributed to companies thought to be leaders in AI.
• Black swan event – By definition, a black swan event is a “high-impact event that is difficult to predict under normal circumstances but that in retrospect appears to have been inevitable.”^[4] Examples of black swan events include the 9/11 terrorist attacks, the 2008 financial crisis, and, most recently, the COVID-19 pandemic.

This is not to say that any of these potentialities will be what ultimately stops the markets from continuing their upward trend, but they are what keep me up at night.

Never one to be all doom and gloom, there are also reasons to be optimistic. Many of these reasons echo the risks.

• Change – Not always bad. Maybe the policies of a new President, House and Senate lead to economic growth.
• Foreign conflicts – Cooler heads could prevail and tensions could ease around the world, especially in the Middle East.
• Market rise continues – The great run keeps going. Even with some investors taking profits, they look to invest in areas of the market that have not participated in the increase as much. Think about value, international, and small cap stocks.
• Low inflation, high employment – While not easy, this is the goldilocks scenario for an economy, and we currently have the grounds for this environment.

So, what is an investor to do when it looks like the economy and the markets might be at an inflection point that could go either way? Let’s review some potential options.

• Invest only in cash – Not the best option. While cash is still getting close to a 5% yield, if the Fed continues to cut rates as they desire, the yield may be 4% or less next year.
• Invest only in fixed income – Again, the Fed plays a big role in this. Rate cuts would help increase the value of fixed income, but if inflation runs hotter than expected, rate cuts might not happen as quickly as the market hopes. Additionally, fixed income returns are below equity returns over a full market cycle.
• Invest only in equities – Depending on your risk tolerance and investment horizon, this could be an option, but for the vast majority it is not the best option. First, you would be investing at an all-time high for the market. While that in and of itself is not a reason to avoid investing, it is worth considering. Second, fully investing in equities does not leave you with cash or fixed income to rotate out of and subsequently into equities should we see a market pullback. Third, it might lead you to watch CNBC all day to see how the stock market is doing, which is not a good idea.
• Diversified portfolio – A portfolio composed of all the asset classes mentioned above (plus others, dependent on situation) is appropriate for most investors. The percentage allocated to each asset class is unique to every investor, depending on the investor’s specific situation and tolerance for risk.

This has been a great year for most investable assets. Maybe that trend will continue, and maybe my nagging feeling turns out to be wrong. Because it is impossible to predict what the markets will do in the short-term, we recommend following a well-developed investment plan that focuses on your risk tolerance and cash flow needs and not a “gut feeling.” Distributing assets across each asset class enables an investor to participate in an up market and decreases the likelihood of having to sell in a down market.  How your assets are allocated among the various types of investments is just as important as the actual investment. This is why we prefer to use the term “wealth management” as opposed to “investment advice” when we work with clients on an individual basis.

Please let us know if you would like to discuss your situation in more detail.

– Will Bowen

The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.