To Washington Park Advisors Clients:
Enclosed please find your summary of Investment Results for the nine months ending September 30, 2024
As you may be aware, the Dow Jones, Nasdaq, and S&P 500 indices are all at or near record highs. Many stocks, however, have not come close to matching the indices’ YTD returns, which have been led primarily by a small number of large cap technology stocks. While much of the financial commentary suggests that investors should be worried about a market decline, there are also indications we may be in the middle stage of a market melt-up, that is; are stocks rising too rapidly relative to their earnings? On October 13th, 2024, in a New York Times article, Yardeni Research suggested “The question is whether exuberance is quickly turning from the rational variety” (interest rates coming down, employment holding steady, retail sales holding up) “to the 1990’s irrational version”. Yardeni is referring to the dot.com bubble that burst in March of 2000 from which it took years to recover. The S&P 500 had negative annualized returns for the next decade, and it took 14 years for the Nasdaq index to recover to it’s March, 2000 level. During that 14-year period, including the bubble burst disaster, most other stocks did not suffer the same steep declines and instead provided very nice returns. The question is then, will history repeat itself regarding the decline of the indices, while other areas of the market advance? At this point, we are not predicting the same kind of fallout we saw in 2000, but it seems likely to be a risk within a narrow group of individual stocks providing outsized gains within the indices.
Presently, we have seen a broadening out of the market rally, with our equities gaining nicely in recent months. This broadening gives us a cautiously optimistic outlook for stocks, and more importantly, the kind of stocks we own in our portfolios. Many of our equity investments pay attractive dividends, some as high as 6.5%, and as interest rates drop, it makes for a great time to own dividend-paying stocks.
When the Fed lowered rates on September 18th, many investors quickly bought longer-duration bonds, believing rates would be much lower for longer. Although we too considered this, we chose to wait, as we believed the return offered was not desirable for the duration risk. Not immediately buying longer-duration bonds has worked in our favor as the 10-year treasury has dropped, sending the yield from 3.70% on September 18th, to 4.27% today. This has happened because the economic data released in the six weeks since that cut has remained robust while inflation has continued to ease. This is a desirable balance and has muted the expectations of interest rate cuts. We anticipate the Federal Reserve will continue to ease, with Jerome Powell and his team continuing the data-dependent approach to battling inflation. Until the Fed determines they have inflation under control, we also expect a bit of market volatility.
In a matter of days, the U.S. will decide who will be the 47th President. While none of us can predict the outcome, or the immediate reaction of the people, we know a transfer of power will occur. The economy is doing well, job and wage growth have been steady, and inflation is coming down. It is in the best interest of the next administration to keep it that way. Again, we anticipate some market volatility around the election until the dust settles, which we will look to take advantage of when opportunities present themselves.
We are closely monitoring the conflicts in the Middle East, the war between Russia and Ukraine, and the rising tensions in the Taiwan Strait. While we hope for an end to the wars sooner than later and that China refrains from invading Taiwan, we remain vigilant of global events. We are confident that our portfolios are well-positioned to navigate these potential challenges.
In addition to our quarterly commentary, we are pleased to be able to offer you access to our client portal. The portal provides an online view of your portfolio and allows you to receive all communications, including your quarterly statements, electronically instead of by mail. If you are interested in this option, please send an email to clientportal@waparkadvisors.com.
If you have questions, please do not hesitate to call.
Warm regards,
Washington Park Advisors
