“We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.”
Warren Buffet
Warren and his team have been quite active during the last several months, selling over 389 million shares, or half of his Apple position as well as 238 million, or 25% of his Bank of America position. Shares of these companies were mostly acquired during the depths of the GFC. Is Warren practicing what he preaches? I guess only time will tell. As I write this quarters insights, I do so knowing that, in a New York minute, the geopolitical environment we are living in today can switch drastically in the very near-term.
The third quarter has certainly been an eventful one. Generally, September and October are the most eventful not July and August. During the quarter we saw the NASDAQ futures down 1,000 points pre-market and the Volatility Index surged 40 points higher on August 5th. The Volatility Index retraced most of the entire 40-point move higher in a 5-day period marking one of the largest 5-day movements for the index since 1990. Such moves in the Volatility Index tend to cluster together and as we move into October, a month that has seen the 1987 and 1929 crash, investors should prepare for a potentially bumpy month. During the month we also saw the Federal Reserve lower the federal funds rate by .50%, the first rate cut since the Federal Reserve began its rate-hiking crusade to battle inflation on March 16, 2022. Subsequently we saw the spread between the 10-year Treasury yield and the 2-year Treasury yield uninvert after 540 days. This was the longest inversion of the 10-year/2-year Treasury yield curve in history and if history is an indicator of the future, a yield curve has never been inverted this long without a recession shortly following. The 10-year treasury yield, a benchmark yield for car loans and mortgages is now above 4% and 11% higher since the day the Federal Reserve cut rates, leading indicators are still negative, and there is potential for a war in the Middle East that will have all sorts of potential ramifications. Lastly, the S&P 500 is trading at 22 times its next 12 months earnings, a premium of 20% above its historical average and the AAII Bullish Sentiment Survey in August showed the highest bullish sentiment since October 2007.
Ok, now that we got that out of the way, there are some positives out there as well. We are living in the 4th Industrial Revolution led by AI which will bring many benefits to investors over the short to long term. We have seen global policy rates drop as central banks lower rates resulting in an increase of global liquidity. The economy appears to be improving with the September jobs number blowing out expectations. Inflation seems to be under control and the net worth of US households continues to increase.
Pros and Cons:
Pros:
- Below are some items we are watching as we head into the final three months of 2024.
- Fourth Industrial Revolution led by technology boom in AI.
- US employment is in a good position.
- Core Inflation has come down.
- The Federal Reserve has stopped increasing rates and begun its rate lowering campaign.
Cons:
- The Israel-Hamas war has expanded to Lebanon and Iran, greater escalation could be potentially a big problem.
- Inflation picks back up because of Middle East tensions as well as the increase in global liquidity from multiple countries reducing interest rates.
- AI is at its peak hype cycle before it enters the disillusionment cycle for investors.
- Treasury yields start to move back higher.
- The Buffet Valuation Indicator of Total US combined market capitalization to US GDP is overvalued, currently sitting at the 2021 peak.
Conclusion
In my opinion we are in the Fourth Industrial Revolution, a large secular growth path led by AI and technology that will help improve the lives of many around the globe. US company balance sheets and the consumer seem to be in a good position. But we are currently living in an environment that is very uncertain and as wealth managers and financial planners, it is important to leave you with this. Over time markets tend to move higher, they consist of lots of fluctuations and uncertainties so it is ever so important that you communicate with your financial advisory team, discuss your goals, objectives, time horizon and lastly have a wealth management team that understands you.