While I have always considered myself a capable athlete, I have tended to gravitate towards individual activities versus team sports. That is not to say I am not a “team player,” however, more that I fear letting a fellow teammate down due to my performance. Therefore, by placing all of the pressure on myself, I have no one else to blame for the outcome of my athletic endeavors. Perhaps it is my hand-eye coordination, but asking me to “pass the ball” has never been my strong suit. As luck would have it, the gauntlet has been thrown, and I have now been forced out of my comfort zone. Fall has officially arrived, and along with the smell of pumpkin spice comes the obligatory smell of pigskin. This year, to commemorate the NFL season and spark some friendly rivalry, one of our colleagues has challenged the Ulrich team to compete in a game of Fantasy Football. I have to admit, the concept of “fantasy” and “sports” is completely new to me, though I know several people who fantasize about a date with Tom Brady.
While I study the stats, I start imagining the outcome of another mashup, the November election. Indeed, a lot has transpired since our communication from last quarter. We had a Presidential debate; a Presidential candidate withdrew from the race and a new Presidential candidate was nominated (talk about a last-minute substitution!). We also witnessed a past President and Presidential candidate get shot and go on to survive yet another assassination attempt. Far from making the injured list, the former President then challenged the Vice President to a debate which produced a record 67.1 million viewers, far outpacing the average Monday night football viewership of 20 million. Whether these numbers reflect fan popularity or undecided voters will remain a mystery until Americans hit the polls on November 5th. Personally, I have observed far less political signs in people’s front yards compared to previous Presidential elections. Perhaps voters aren’t impressed with the “draft” of candidates, or perhaps they simply do not wish to announce who they are voting for due to the divisive nature of this election season and fear of retaliation (yes, I’ve seen quite a few vandalized signs as well…where’s the Ref?). Even the Teamsters have called a “time-out” to endorsing a candidate in the race for the White House, despite kicking for the Democratic party since 2006.
Outside of politics, the economy appears poised to deliver a field goal or the equivalent of a soft-landing. Inflation continues to cool (PCE at 2.2%) and the labor market is tightening (unemployment at 4.2%), seemingly taking a page out of the Fed’s playbook for success. The yield curve has officially un-inverted (the 2-year Treasury now yields less than the 10-year), which could bode well for markets assuming we can dodge an unexpected “sack” or recession. There is noticeable vulnerability in the offensive line, however, with the consumer showing signs of weakness. Credit card and car loan delinquencies are on the rise with 9.1% and 8% of respective balances currently overdue, the highest in over a decade. In addition, consumer confidence came in at 98.7 in September (a 3-year low), well below the expected reading of 104.The underdogs (small cap companies) have also struggled to put points on the board, as they carry more floating rate debt than their larger cap rivals and are still tackling higher costs of rebuilding supply chains. Small businesses are the driver of the economy and employ more Americans than publicly traded companies, which could also account for some of the booing from the sidelines.
To that end, quarterback, Jerome Powell, has been carefully assessing the temperature of the field and surprised the crowd with a “Hail Mary” pass in the guise of a 50-basis point rate cut in September. This Federal Reserve audible from the pocket fulfilled many investors’ fantasies as markets rallied on the move. The half-point cut was seen as a win on beating inflation and a shift towards more concern over weakness in the labor market.
It was also a significant turning point for commercial real estate which has experienced some unnecessary roughness as borrowers are squeezed with higher refinancing costs on top of increased equity coverage ratios.
This stream of monetary stimulus, combined with the still strong fiscal tailwinds to economic growth from the CHIPS Act, the Inflation Reduction Act, the Infrastructure Act and increased spending on artificial intelligence, make the odds of recession more unlikely. In addition, there are significant cash balances sitting on the bench that have yet to join the game ($6.76 trillion in Money Market as of the end of September). Even China is getting into formation after announcing a major stimulus package to boost their struggling economy which lifted local stocks and commodity prices, including hall-of-famer, Doctor Copper.
Speaking of metal, gold has also been pushing new highs. At over $2,600 an ounce, a gold bar now costs over a million dollars! Generally seen as a safe haven, gold’s recent robust performance seems counter intuitive to the direction of the stock market. Instead, it may reveal that foreign central banks have less faith in the U.S. dollar given our soaring debt and rising deficits. Interest expense alone has doubled since pre-pandemic times and now accounts for more than our military spending. It’s hard to play ball without a decent defense and yet neither candidate appears focused on solving our ballooning debt. No one fantasizes about tax hikes, so they do not make popular campaign stumping!
Closing Thoughts
Just like a football game, we are entering the 4th and final quarter of the year. It has been a strong season, but we cannot claim victory quite yet. Markets are pricing in a 100% chance of further easing at the two remaining Fed meetings, so any change to that could result in a fumble. Likewise, geopolitical risks remain high as wars still rage in the Middle East and Europe, and tensions continue to rise in the South China Sea. As always, we will continue to monitor all potential threats and huddle on potential opportunities. Despite the earlier mentioned fantasy football “performance anxiety,” your Ulrich team is always here to catch the proverbial ball, no matter what life throws at you.
Regards,
Equity Markets
U.S. stocks posted solid gains in 3Q, extending the strong performance for the year. The S&P 500 gained 5.9%, outperforming the tech-heavy Nasdaq Composite, which returned 2.1%. Year-to-date the S&P 500 (+22.1%) remains ahead of the Nasdaq (+20.0%). Within the S&P 500, Utilities (+19.4%) and Real Estate (+17.2%) led the sectors while Energy (-2.3%), Technology (+1.6%), and Communication Services (+1.7%) were the worst performers. Small cap stocks outperformed large cap stocks (Russell 2000: +9.3% vs. Russell 1000: +6.1%). Value beat growth (Russell 3000 Value: +9.5% vs. Russell 3000 Growth: +3.4%), but growth remained ahead year-to-date. The Magnificent Seven were up 35% year-to-date and represented 45% of the S&P 500’s return this year (top three were Nvidia: +136%, Meta: +63%, and Amazon: +22%)
Global ex-U.S. equities (MSCI ACWI ex USA: +8.1%) also finished the quarter strong, boosting returns year-to-date (+14.2%). Within developed markets, Value (MSCI World ex-USA Value: +9.7%) outperformed growth (MSCI World ex-USA Growth Index: +5.9%) by a wide margin. Real Estate (MSCI EAFE Real Estate: +17.4%) and Utilities (MSCI EAFE Utilities: +15.6%) were the strongest-performing developed market sectors. Japan (MSCI Japan: +5.7%) was up for the quarter, but stocks declined in September following the election of a new prime minister known for pushing fiscal discipline and being a China hawk.
Emerging markets (MSCI Emerging Markets: +8.7%) outperformed developed markets (MSCI EAFE: +7.3%). Asia was the strongest region (+9.5%) with Thailand (+28.9%), China (+23.5%), and Malaysia (+20.5%) leading the way. Europe declined in 2Q, led by Turkey (-12.6%). Consumer Discretionary (+23.3%) and Health Care (+19.7%) were the strongest-performing sectors for the quarter. Energy (-2.5%) declined as oil prices have sunk this year.
Fixed Income Markets
The Bloomberg US Aggregate Bond Index soared 5.2% after producing flat returns in the previous quarter. Year-to-date, the Aggregate Index is up 4.9%. The 10-year Treasury yield sank 55 bps during the quarter, closing at 3.8% as markets priced in a higher probability of a deeper economic slowdown and more aggressive cuts. In early September, the 2-year and 10-year Treasury yields steepened and un-inverted for the first time since July 2022. All the Aggregate sectors outperformed Treasuries on a like-duration basis, led by agency mortgage-backed securities. Investment grade corporates (+5.8%) outperformed High Yield (+5.3%) for the quarter. Spreads broadly remained flat over the quarter despite intra-quarter volatility and remained tight relative to historical averages. Both investment grade and high yield issuance was robust in 3Q.
The Bloomberg Global Aggregate Index rose 7.0% (+4.2% hedged) propelled by dollar weakness as the U.S. Dollar Index declined. The story was similar within the emerging markets with the local currency JPM GBI-EM Global Diversified Index (+9.0%) outperforming the hard currencydenominated EMBI Global Diversified Index (+6.2%).
Municipal bonds posted gains in 3Q (Bloomberg Municipal Bond Index: +2.7%) with lower quality outperforming (Bloomberg Muni High Yield: +3.2%). The municipal bond yield curve steepened with the front end of the curve declining more than the long end. Ample supply for the quarter was met with strong demand.
Source: Callan
The views expressed represent the opinion of Ulrich Investment Consultants. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from sources that have not been independently verified for accuracy or completeness. While Ulrich Investment Consultants believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Ulrich Investment Consultants’ view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.