December 2024 Market Commentary

Returns across almost all major asset classes YTD have been solid, and we have seen equity markets rally since the Presidential election of 11/5 in an overall “risk on” trade. While many market participants and commentators have referred to this as a “Trump Trade” we view this more an alleviation of an unknown coupled with a small measure of improved clarity towards future policy direction. The questions we continue to ask ourselves are, are the returns seen over the last few weeks a relief rally, or is this indicative of future returns? And what will drive these future returns?

We are of the opinion that after any election, there is some level of relief in that an element of an unknown election outcome is no longer weighing on investors’ minds (or frustrating people watching TV with never ending contradictory messages). For those of you who remember the movie Elf, Buddy (played by Will Farrel) is a human who is raised in the North Pole and as an adult finds out that he is not an elf but is instead a human. While many investors believe an election will make or break an economy and thus drive overall investment returns, our investment philosophy is grounded in the analysis of the fundamentals rather than sentiment towards the future. Said another way, we try to look at the facts to draw conclusions and poke holes in things that do not immediately fit, such as a six-foot three elf being an outlier in Santa’s North Pole workshop.

So, what are the fundamentals of the economy and the stock market telling us right now? Overall, the economy remains strong. Third quarter GDP came at a 2.8% growth rate, while narrowly below economist expectations, still exhibiting solid growth. Inflation has come down markedly, please see below chart of PCE Y/Y change. While the PCE and more widely known CPI data has showed significant moderation, we are encouraged that inflation is actually contained when we look at a comparison of wage growth relative to the Quits Rate, please see the top frame of the below chart. The US economy had been operating well below full employment, resulting in a tight labor environment and thus job quitters were able to get hired at higher levels of wage growth. While that is great for the individual employee, that trend taken on a larger scale helps to keep inflation high through a wage/price spiral. Job moderation also gives room for the Fed to continue easing interest rates. It is worth keeping in mind that the Fed’s mandate is to both manage inflation and unemployment. Overall, inflation is almost within grasp of the Fed’s 2% target, real GDP growth hasn’t been sacrificed and corporate earnings remain solid.

Of even more importance on a going forward basis, recent surveys indicated businesses had postponed capital allocation decisions until after the election due to uncertainty. According to KPMG’s 2024 US CEO Outlook Pulse, 62% of CEOs were delaying decisions on investments until after the election and 61% of small business owners indicated they were delaying major business decisions according to Key Bank’s Small Business Flash Poll. This pent-up business demand in an environment of good economic data, low unemployment, persistent GDP growth and moderating inflation provides an excellent opportunity for deploying risk assets across portfolios.

Overall, given the fundamentals of the market and economy, we view positive growth going forward. While valuations are not cheap, they are reasonable given growth projections giving us very solid upside potential from these levels. To bring it all together, we continue to view recession as a low probability event in the next 12-18 months outside of a significant negative impact caused by geopolitical risk as an example. Within the equity market, we view growth and small caps as having greater upside potential so have moved positioning incrementally towards the growth side of the style box while still maintaining exposure throughout the style box. We continue to view fixed income attractively and are solidly of the opinion that extending duration to an intermediate level is much more attractive on a going forward basis than rolling near term maturities. Overall, we continue to lean towards US exposure as opposed to developed international and EM exposure, because of the growth characteristics we see in the US relative to the rest of the world as well as the stronger dollar. While we view the outlook to be positive, we continue to be an advocate of diversification and maintaining a long-term view while leaning into moderate tactical adjustments where we believe there are attractive near-term risk/reward characteristics such as described above.