The third quarter witnessed a few reversals. The upward trend in interest rates reversed with the widely anticipated first Fed rate cut since the Covid days of 2020. The information technology (IT) sector reversed from being a leading sector to one of the worst-performing sectors in the third quarter, although it is still the top performing sector year to date. The communication services sector, home of Google, Meta/Facebook, and Netflix, also had a mediocre quarter as investors rotated to sectors that benefit from lower interest rates. These beneficiaries include the financials such as JP Morgan and Chubb, and consumer discretionary names such as Home Depot and home builders like D.R. Horton. Also helped were retailers like Costco and Walmart, as shoppers continue to look for bargains. Industrials continued to fare well as Federal money is stimulating the group.

One worrisome reversal was the yield on the 10-year U.S.Treasury, which surprisingly went up about 0.13% after the Fed rate cut. The 10-year bond is widely used as a benchmark for setting mortgage rates so people hoping for lower mortgage rates may be disappointed. The 10-year yield had dropped a lot this summer, from 4.7% in May to 3.62% before the Fed made its move. The old Wall Street adage of “buy on the rumor, sell on the news” may apply here, so don’t be too alarmed. On the other hand (don’t you wish economists only had one hand), one place where there wasn’t any sign of a reversal is with the Federal deficits. These deficits require the Treasury department to continuously sell huge amounts of new bonds and finding buyers for this endless supply might require higher yields.

One of the best-performing assets this year has been gold, up 27% for the first nine months. In the past, gold prices have been the canary in the coal mine, providing an early warning on too loose of a monetary policy. Gold has risen another $100 since the Sept. 18 rate cut to an all-time high of $2,682 per troy ounce. On the other hand, gold also rises in times of fear, and Israel’s battle against Iranian proxies has raised the fear level of what might happen next.

As we end the quarter, there have been a few encouraging signs of strength from recent regional manufacturing data. Consumers keep spending and GDP estimates for the third quarter are for growth of over 3%. While the tech stocks took a breather this quarter, they are still well positioned for growth over the foreseeable future. It is always fascinating to watch what unfolds in our world’s dynamic economy. We always get a mix of good and not-so-good economic news, but owning a diversified portfolio of high-quality companies remains the best way to protect the purchasing power of your wealth over the long term.

"Written in October 2024 for 3Q2024 Investment Outlook"