Stocks climbed across the board in the third quarter. Large domestic companies, measured by the Standard & Poor’s 500, were up 5.5%. Smaller US firms, as measured by the Russell 2000, surged 8.9%, while the Nasdaq Composite, reflecting tech companies, advanced 2.6%. Foreign firms, generally speaking, climbed with the Dow Jones World Index (ex US) up 7.6%.
Enthusiasm for the mega-cap tech stocks, and the AI narrative propelling their valuations, waned during the quarter. Investors seemed to question just when the huge capex sums being dedicated to these efforts will pay off. More than half of the “Mag 7” companies saw their stock prices decline. The good news is investors saw opportunity in other sectors of the market, as benign inflation data led to an expectation of Fed rate cuts. We witnessed a rotation out of growth strategies and into value stocks. Indeed, the Fed did cut the fed funds rate 50 bps in September. Economic numbers have been largely positive and, for a refreshing change, good economic news is good market news. The expectation is for two more modest cuts of 25 bps each by year end. It appears (fingers crossed) that we have tamed inflation while avoiding a recession. In Wall Street parlance, what many believed would require a “hard landing” may only result in a “soft landing”, or perhaps “no landing” at all. Who doesn’t love Wall Street speak?
The broadening of market leadership is a welcomed development. We saw signs of this in Q1 and now again in Q3. The S&P 500, considered the primary measure of our domestic markets, is capitalization weighted. As such, a handful of the largest public tech companies (Mag 7, FAANG previously) have the greatest influence on the “market”. However, there are ten other market sectors composing the index. So, in periods when the tech sector experiences a downdraft, support from other industries is critical in providing positive stock market returns. For Q3, we offer kudos to utilities, industrials and financials for stepping up. And let’s also recognize small-cap domestic stocks, responding robustly to the prospect of lower borrowing costs. This type of overall market performance increases optimism for a more sustainable rally.
Our advice to investors at this point would be to keep expectations in check. We’ve experienced significant gains year-to-date, and many feel stocks are priced for perfection. We all know, at some point, markets will experience a contraction. It’s a matter of when, not if, and predicting exactly when that will occur is not possible. This highlights the importance of monitoring one’s consolidated portfolio to ensure current allocations are in line with one’s appropriate Target Asset Allocation. By doing so, when the inevitable contraction does occur, the investor is less likely to be caught flat footed.
Please know that we welcome your calls, texts, emails, etc. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.