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Buckle Up! There are three months to go in 2024 and it should be quite a ride. We have a lot of topics to discuss in this newsletter: interest rates, inflation, strikes, geo-politics, natural disasters, stock markets, and of course a Presidential election!

Let’s start with a look back at the last quarter before we look ahead. There was a swift pullback in the global equity markets in the month of August. There were fears of recession caused by soft economic data points, bad jobs reports and the Federal Reserve not lowering rates over the summer. The drop was made worse by an unwinding of a foreign carry trade (a complex situation that we will not get into details in this newsletter but always happy to discuss). You can see the dip in the chart below and quick recovery of the market as fears of a recession disappeared and economic and job reports got better.

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Interest rates and inflation

We have been writing about the Federal Reserve and interest rates for several newsletters. Back in January, the market believed that we would see as many as six rate cuts this year. We never believed that would happen and doubted we would see any rate cuts, at the most one or two. Federal Reserve Chair Powell was adamant he wanted to see inflation back around 2%. The tricky part is when to start rate cuts and how to cut rates, so you have a soft landing and not a recession. In September, we got the CPI report around 2.5%, and the Federal Reserve lowered interest rates 50 basis points.

When the Federal Reserve lowers the interest rates, that primarily affects the short-term rates, the longer-term rates are typically affected by investors. Yields on the 10-year Treasury started to decline prior to the Federal Reserve’s 50-basis point cut. We mention this because, as illustrated below, the yield curve has been inverted (short-term yields higher than long-term yields) for a long time and this is beginning to reverse with the 10-year now higher than the yield on the 2-year Treasuries.

In the chart below, we can see that current 10-year rate is around 3.75%. For many of our clients, we have been investing the fixed income portion of their portfolios in Callable Yield Notes for the enhanced yield. With the downward move already experienced in yields and several more interest rate cuts forecast by the market later in 2024 and 2025, the use of alternative fixed income like Callable Yield Notes and Private Credit have been popular options for our clients.

A look ahead

As we look at current events happening around the world and right here in the United States, there are too many scenarios to predict how the market will react. To begin, the United States economy is strong, inflation is lower, and rate cuts have started. Here is a list of just a few of things we are watching:

Hurricane Helene tore through the Southeast causing immense damage. At least 220 have been confirmed, at the time of this newsletter, to have not survived and that count is growing. Several million homes were without power and financial damage could be one of the most expensive storms in history.
The International Longshoreman’s Association Union went on strike in approximately 36 ports from Maine to Texas. The union represents dockworkers at East and Gulf coast ports that handle 60% of United States shipping traffic. The union is asking for more money, but the real critical issue is robots and automation to move cargo are putting their jobs at risk.

**Since Quarter End, the strike has been suspended until Jan 15. A tentative agreement on a 62% pay increase over six years has been negotiated.

The Middle East conflict is heating up between Israel and Iran. What started in October 2023, has escalated from just Israel and Hamas to include Hezbollah, and now direct involvement from Iran. The fear of an all-out war including US troops is affecting oil prices and the stock market.
With the Middle East in the news daily, it is easy to overlook the continued conflict between Russia and Ukraine. The direction of the war could be affected by which party prevails in November.
China began sweeping stimulus to revive their sluggish economy. Currently it is too soon to tell how this will affect US Markets.

Election

The election is less than a month away. We hope you were able to join Mike Townsend and Craig Novorr for our webcast about the state of the election and government affairs in Washington. Instead of making predictions of who will win in November, we would like to share a few charts to remind everyone that regardless of who wins, or which party is in control, the stock market tends to be just fine. Your retirement funds will be fine, and staying calm and being a long-term investor pays off in the long run. Our first chart is one we have been watching for many cycles, It illustrates how the markets do in each year of the four-year presidential term.

As you can see above, in an election year, the markets tend to do very well. Through September of this year, the S&P 500 is up over 20%. To break this down even further, Mike Townsend shared this chart of the returns in each election year going back to 1928.

We hear and read a lot of opinions that the markets do better in a Republican or Democrat run government, but what we see in the next two charts shows that the best course of action is to stay invested and ignore all the political noise.

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As we can see going back to Truman in 1947, US real GDP grows for both parties and has increased under every president for the last 77 years.

The above chart speaks for itself, stay invested and do not try to time the market, especially based on who is in office, could negatively impact your portfolio.

The conclusion of all the above in this newsletter is that there could be a lot of volatility, fear, excitement, good news and bad news, but in the end, the economy and the markets recover and tend to continue to go higher. While there are no guarantees this will continue, we believe it will and continue to look for investment opportunities to help you reach your financial goals.

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How to stay informed

Our new website was launched in the first quarter of 2023. We also completed our in-house recording studio to create educational videos, address current events and discuss our thoughts on the industry. You can find our videos through our website at https://www.paragoncap.com https://paragoncap.sharepoint.com/sites/FileShare/Marketing/Quarterly Newsletters/Newsletters/2024/or on our YouTube channel at https://youtube.com/@paragoncap. If you subscribe to our YouTube channel by hitting “subscribe” button, you will be notified when new videos are posted.

In addition, for up-to-date news and thoughts from Paragon, plus interesting articles on current topics, we encourage you to follow us on LinkedIn and/or Facebook (links below). We have company pages for both and appreciate your liking and/or following us.