Cassie Laymon:
Hillary, it is great to have you back for our third quarter market commentary. It seems like the year is just flying by,

Hillary Sunderland:
Certainly is Cassie. Good to be back.

Cassie Laymon:
So why don’t you just take a minute and tell us about what has happened in the third quarter in terms of performance and anything else we should know about the markets?

Hillary Sunderland:
Sure. Well, it was a fairly volatile quarter for the markets. In July. We had a furious rally, especially within small cap stocks, and that was followed by a very pronounced pullback over just a few days at the beginning of August as investors worried about some jobs numbers that came in and there was some shock waves from Japan raising interest rates.

As I said in the market commentary video that you and I did back in early August, we expected that that pullback would be fairly short-lived, and that did turn out to be the case. The Federal Reserve ended up cutting interest rates in September, which combined with more encouraging news on the economic front, led to another rally as shown in this chart, both stocks and bonds in the US and abroad ended the quarter with mid to high single digit returns.

And you may recall that for the first half of 2024, a lot of those returns were concentrated in just a few technology companies. But that has started to change with other sectors participating in the market advance that we’ve seen over the last few months, and that’s very constructive for stocks as a whole.

Cassie Laymon:
Well, I remember from a few of our past commentaries that you were expecting to see some good returns from bonds going forward, and so it’s very encouraging to see that that is actually happening. And so what do you have to say to our more conservative investors? What can they learn from the market environment over the last few years?

Hillary Sunderland:
Yeah, good question, Cassie. So I talked a few times over the last year or so about the opportunity cost of staying invested in CDs or money market funds as interest rates were peaking. From a historical perspective, if you’re able to get past the temptation of high CD rates when interest rates are peaking and invest in the bond and stock markets, instead, you often come out ahead.

I’ve shown this chart before, but now that we’re 12 months out, I thought it would be good to bring this back to your attention. This shows the opportunity cost of staying invested in six months, CDs for an additional year, want interest rates. Peak and interest rates actually peaked for CDs in September of 2023. Now that we’re 12 months out and the Federal Reserve has started to lower interest rates, once again, you can see that the opportunity cost has been quite high for sitting on the sidelines.

As you can see on the far right hand side of this chart, we’ve seen a 12% performance from the broad US bond market, a 36% return from domestic large cap stocks, which is the green bar there, and about a 20% return from the typical balanced portfolio, which is the light blue bar shown there. And that’s over the last 12 months. All of those asset classes have significantly outpaced return of a money market fund or six months cd.

So the message that we’ve been repeating over and over again of getting the excess cash sitting on the sidelines invested as interest rates were peaking really did pan out, and I think it’s a good reminder to investors to consider what’s likely to happen in the future instead of focusing on what’s happened in the recent past and leading that to sitting on the sidelines for a prolonged period of time.

Cassie Laymon:
Well, we are headed into the last quarter of the year. There was one thing on everybody’s mind, even though we’ve talked about it a few times this year because it’s been a hot topic. Tell us your thoughts on how the election may impact the market to close out the rest of 2024.

Hillary Sunderland:
Sure, Cassie. It is probably the biggest question I’ve been receiving lately. The most likely outcome of the November election appears to be a divided government with no single party controlling the White House, the Senate, and the House of Representatives and a divided government has been the norm for the last five decades, and one that markets typically welcome because when you have a divided government that decreases the possibility of sweeping legislative changes.

One thing I want to just impress upon our clients is that broad market returns will not depend on who becomes president. While emotions can flare up in an election year, what we find is that the market moves based on other factors and making changes to your portfolio on the potential outcome of an election has, in my view, a very low probability success. You would have to predict not only who will win the White House, but also what the composition of Congress will be, what policies are actually implemented, and then also be able to predict how the market will react to those policies.

So I thought it might be helpful just to walk through an example. So President Trump campaigned vigorously to support the traditional energy industry during his presidency while Biden campaigned on scaling back fossil fuels and passed the largest ever fiscal commitment to climate initiatives upon becoming president. But as shown on this slide, performance was very much the opposite of one might expect renewable energy, which is the green line there actually performed very well under Trump’s term, but has not performed well under Biden.

The reverse was true for traditional energy. The black line on this chart, traditional energy sector did not perform well under Trump, but has performed well under Biden. There are just so many other macro factors that the market moves on that have little to do with who wins the White House. So overall, people have a tendency to want to invest based on their perceptions of the economy, and that can lead to some very emotional decision making because their perceptions can be heavily skewed by political preferences.

Just to show you one more chart, when a Republican is in office, which is the red line there, Republicans tend to view the economy as doing much better than Democrats do. And the opposite is true for when a Democrat is in the White House.

People are very often surprised by this, but if you look at the row where that yellow arrow was pointing under both the Obama and Trump administrations, the S&P 500 returned about 16% under Biden, the market has returned just over 13% through the end of the third quarter of 2024. Underneath that performance, you can see real GDP growth, which is a measure of the growth of the economy. Despite the very large swings in perceptions about the economy, the economy grew at or around its 2% average growth rate through each administration, Bush, Obama, Trump and Biden. So if an investor sat in cash due to fears about political outcomes, they would’ve left a lot of money on the table. So my advice to everybody is really to do your voting at the polls and not in your portfolio.

Cassie Laymon:
Oh, that is a great reminder, Hillary, a thank you to you and your team for helping us to have the voice of reason when it comes to investing around the election. We appreciate all the hard work that you’re doing for us, and we’ll look forward to seeing you again at the end of the year.

Hillary Sunderland:
All right. Thanks, Cassie.