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EXCERPT FROM CLIENT LETTER October 2024  (see full letter above for tables, charts, and full commentary)

FROM THE DESK OF BOB CENTRELLA, CFA                                                                     October 7, 2024

The summer is sadly behind us and Q3 is in the books, but it was a good one in the financial markets. More on that in a minute. I hope you all had a great summer. When not working, I spent a lot of the summer golfing, going to the beach and attending rock concerts. We were on an “old man” tour kick, seeing Neil Young, The Rolling Stones, and ELO among several others. I figured it was a possible last chance to see these classic rock bands. Last year we saw The Eagles twice and are scheduled to see them at the Sphere in January. IMHO, there are fewer good new rock bands anymore, so I keep listening to the stuff I grew up with. I also saw Hootie, Matchbox 20, The Outlaws, The Cranberries and even a few more.  Shoot me an email if you saw any fun concerts this summer. Speaking of shooting, my wife will shoot me if I buy any more concert t-shirts!

As for Q3, the market also kept on rocking & rolling as stocks and bonds produced solid returns. The S&P 500 returned 5.75% as the much-anticipated September swoon never happened, and ended the quarter up 21.85% YTD. It looked like the market was going to correct in July and August as it fell -9.7% from mid-July to the beginning of August after 2 big down days had investors thinking the worst as stocks fell 5%. But a decent jobs report brought bargain hunters back and the market recovered in August and ended up having a good September contrary to historical seasonality. On the bond front, the Federal Reserve lowered the Fed Funds rate by .50% in September and bonds rallied. For the quarter, the Barclays Bond Aggregate returned 5.3% and the yield on the 10-Year UST fell from 4.34% to 3.80%, a decline of 90 basis points from its high for the year in April. 

BOND OUTLOOK

Bond yields this past week have risen back to the 4% level for 2-Yr to 10-Yr US Bonds. At the short end, 3-Mo (4.65%) to 1-YR (4.25%) yields are still higher but expected to fall in coming months if the Fed continues its rate reduction effort. Assuming inflation remains in check and no recession occurs, we expect the Yield Curve to finally revert over the next 6-9 months and normalize around the 4% level. As such, we see returns at this level or somewhat higher on a total return basis through 2025. So, bond returns of 4%-6% are possible from here through 2025. Obviously, if the Fed must be more aggressive due to a weaker economy, bond total returns could be higher as prices rise and yields decline.  We now favor lengthening maturities to lock-in 4% yields as money market yields decline. 

 EQUITIES OUTLOOK

As we’ve already talked about, stocks are somewhat expensive on a historical basis overall, but the broadening rally shows that there are many pockets of opportunities among the non-mega caps. Mid-caps and Small-caps appear to have a valuation advantage and may respond favorably to further rate cuts. On a sector basis, cyclical and rate-sensitive stocks tend to do better as the Fed cuts rates. In this rate-cutting cycle the Fed is walking the tightrope of keeping inflation inline while keeping the economy growing and not falling into recession (soft-landing). Earnings growth on a sector basis favors Technology, Health Care and Comm Services as the strongest with Energy, Materials and Financial the weakest in Q3. I continue to like a diversified portfolio favoring a combination both the Megacaps and other Large/Mid-caps with a higher weight to non-Mega cap stocks.  Exposure to mid-cap and small-cap stocks during a rate reduction cycle is also recommended. On the international front, I still favor developed nations, but Emerging economy stocks tend to do well in a rate reduction cycle too.

 SUMMARY AND CONCLUSION

The Q3 seasonal pattern threw us a bit of a curve ball as stocks rallied in September. Does that take away from some of the typical Q4 seasonal strength? I don’t think so. The next few weeks of earnings season could be bumpy for stocks, especially among the higher-valued mega caps if they don’t report solid numbers and give a decent outlook. But overall, I still expect a positive return in Q4 especially after the election is past us.

My 2024 base case forecast was for a nice up year for stocks and a collect-the-coupon year for bonds. Stocks have done better than expected while bonds have been about in-line after the nice run in Q3. I think Equities outperform bonds in the 4th quarter, but bonds should be held for income and protection in balanced accounts and will produce positive returns. For equities, I continue to favor a diversified equity portfolio with some exposure to mid, small, and international stocks as well. Stock-picking will be key.  Look for non-mega caps to continue to do better as the breath in the market continues to expand.

Feel free to contact me with any comments.  Have a great Fall and Winter.

Bob
  
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Bob Centrella, CFA
Managing Partner
Forza Investment Advisory, LLC

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FORZA INVESTMENT ADVISORY, LLC

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