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Quarterly Letter to Clients

October, 2024

Indices at quarter-end (September 30, 2024):

Dow Jones Industrials: 42,330.15 3Q'24 +8.20% YTD +12.31%

Standard & Poor's 500: 5,762.48 3Q'24 +5.53% YTD +20.81%

The Fed finally moved on interest rates, cutting the Fed Funds rate by 0.5%, with additional cuts telegraphed to occur before year-end. For all of the expectation and excitement that preceded this widely-anticipated move, it was basically a non-event. Stocks actually dropped on the day of the announcement, though they soared the following day. But that was it. All of the focus, it seems, has turned to the upcoming election.

Normally, I don't comment on politics. I try to stay on topics related to business and markets. After all, if you state a position, you will offend half of your audience. There is so much anger, so much misinformation, fueled by people who stand to gain if their side wins. I will say that the office of the president should require a bit of dignity.

But does it really matter which party's candidate is elected? From a market perspective, there is a clear preference for a Democratic president; stocks do significantly better when a Democrat is in the White House. From an economic or business point of view, it seems to me that elections have very little immediate impact on the real world. I do constantly fret about our nation's level of debt, and neither party is willing to address our spending or our national income (the tax base).

The Fed has been trying to engineer a "soft landing," meaning a reduction in inflation without causing a recession. So far, it looks like they are successful. Politicians may squawk that things are bad in the economy, but go to the mall, or just drive on the highways. Do you see evidence of a slowdown? To this observer, it looks like business is brisk. U.S. houseshold wealth hit a new record in the second quarter. There is positive news on housing starts, industrial production, and retail sales. Everyone is employed who wants to be employed. Are you going to believe what an angry politician tells you, or are you going to believe your own eyes?

During the third quarter stocks moved higher, with some amount of ebullience leaving the so-called "Magnificent Seven," and shifting to more prosaic names. For a change, the Dow Jones and the S&P out-performed the tech-heavy NASDAQ in the period.

The cut in rates meant that bonds firmed, a welcome move to bondholders and corporate finance departments as well. There is a hidden plus, in that the government's huge debt expense is more easily carried. Corporate bottom lines should be positively impacted, and we know that over the longer term, stocks will follow the trajectory of corporate earnings.

Interest rates move in a very long cycle. I believe that rates have seen their nadir. There will doubtless be more cuts coming, but over the longer term it is hard to imagine getting anywhere near the zero level that was reached a couple of years ago. That longer term might be 30 years or more, and that leads me to other thoughts.

Lately I am reflecting that there are stages to one's investment process, stages that relate to age. Youth is one stage, when you have very little investment capital; middle age is when most people start to put aside meaningful retirement amounts; and old(er) age, when we simply want to preserve our capital and not die broke.

During each stage the risks that we are comfortable taking are different, as is our competitive drive. I am in my fourth quarter now, and while I still feel competitive, I also know that I am unwilling to take certain risks. I won't buy a stock that trades at too high a multiple of earnings; I won't buy a company that carries too much debt; to me the pain of losses is greater than the joy of gains. I like dividends, and while from time to time I may buy stocks that do not pay their owners, I much prefer to see some income, even if just a little, from each of my investments. My portfolio should pay me, in cash, not just the promise of capital gains.

I can remember a time in my history when I did not care about these things, and I cannot exactly recall when it was that they did become important to me. It was a gradual change. Still, the competitive spark burns.

Barbara and I came through the hurricane safe, and with only landscape damage to our home. We are fortunate, as several friends have lost their homes. The cleanup will take quite some time, but, thank God, we are still healthy.

Jim Pappas