The Cornerstone Investment Commentary: 3rd Quarter 2024

The benefits of diversification shone brightly in the third quarter as foreign, small-cap and value stocks led the way to strong returns in a sharp reversal of roles from the first half of 2024.  In addition, bonds with longer-term maturities had their strongest gains since early 2020.

The catalyst for these results was growing confidence that the economic future holds slower inflation with steady economic growth.  Indeed, this year’s Social Security adjustment is tracking toward just 2.5%.  This allowed the Federal Reserve – at last – to begin reducing interest rates and shift its focus to the cooling labor market.  In such an environment, the equity categories mentioned above – comprising about 65% of your total equity holdings – each gained 8-10% while U.S. large-cap growth stocks rose just over 3%.

These U.S. large-cap growth and technology stocks have been the market’s leaders by a large margin since 2022’s bear market ended, and your portfolio’s results have benefited significantly.  While it’s impossible to know if last quarter’s results represent a ‘changing-of-the-guard’ in terms of performance, it is a healthy development to see investment results coming from a broad range of asset classes rather than from just a single asset class (and sometimes from just a single stock!).

Our mid-July decision to favor intermediate-term bonds over shorter-term bonds also benefited from these conditions as the former outperformed the latter by over 1.5%.  As long as future inflation and economic growth follow their current paths, this more ‘normal’ situation appears poised to continue.

In this light, we believe your portfolio’s holdings are well-positioned.  We also remain mindful of possibilities which could alter today’s favorable ‘Goldilocks’ conditions where neither are too hot or too cold.  Economic events such as a slowdown in growth or to the labor market would be highly unfavorable for all equities (though favorable for longer-term bonds); recovery from such events can sometimes take a while.  Convincing evidence that these are materializing would lead us to adjust your portfolio’s allocation.  On the other hand, concerns about non-economic uncertainties related to elections or military conflicts tend to produce unnecessary financial losses for those who needlessly try to time investment decisions to their advantage.  We will be watching how markets react to all such events as 2024 moves toward its close.

With wishes for a meaningful and enjoyable upcoming holiday season, we thank you for the continuing opportunity to work together.