The Balancing Act – 3rd Quarter Commentary

If you are a fan of women’s gymnastics, you may have watched how remarkably challenging the balance beam was this year at the Paris Olympics. Like a true investment nerd, this Olympic event came to mind as Chairman Powell spoke after the committee lowered interest rates by 50 bps.  

Powell’s prepared remarks leaned heavily into the work of the Fed to balance the upside risk of inflation and the downside risks of unemployment. They believe that inflation is coming in-line with their long-term 2% goal and unemployment is around where it was before COVID-19. They have the balance they want, so they loosened monetary policy. They hope to keep this balance – that the lowering rate doesn’t push inflation back up and that it keeps unemployment from teetering further down.

So here we all are, on the beam, balancing. The market anticipated at least a 0.25% decrease and was slightly surprised by the 0.50% decrease. The general expectation and eventual rate change action helped generate a third quarter return of 6.98% in the Bloomberg Global Aggregate Bond Index. The S&P 500 returned 5.89% while the MSCI ACWI net Index returned 6.61% for the quarter.

Wait - those are not balanced numbers. As of September 30th, year-to date, the Bloomberg Global Aggregate Bond Total Return Index is up 3.60%, the S&P 500 Total Return Index is up 22.08%, and the MSCI ACWI net Total Return Index is up 18.66%. These are big numbers. These are perfect routine, stuck the landing, crushed it kind of mid-year numbers.

So why am I thinking about the balance beam in Paris which proved so challenging for gymnasts? We haven’t dismounted the beam yet. Getting off the beam gracefully is tricky business. The following balancing acts demand our focus:  

1. The role of bonds in portfolios is shifting. As interest rates increased over the last few years, newly issued bonds began to provide better yields; however, older bonds repriced lower. As interest rates lower, bond portfolios are well positioned to balance out prior market value declines.
2. Cash and cash equivalent investments need to be re-examined considering investor goals. Over the next year, return on cash will likely be lower than currently available. Money Market, CDs, and US Treasury I Series Bond investment levels need to be evaluated and, potentially, redeployed in different vehicles.
3. Balancing upside opportunity with downside risk needs attention. Lowering rates are a tailwind for both stocks and bonds IF the economy stays strong and inflation doesn’t reemerge. We have, over the last quarter, extended the maturities of most bond portfolios. As a result, both our bond and stock portfolios are positioned for a potential tailwind.
4. Awareness around the US elections and geopolitical conditions remains important. We feel the uncertainty in the air and recognize that our portfolios must function across a lifetime of political environments and shifting geopolitical landscapes. Our strategy is to be patient – dare I say balanced.These items are typical balance beam routine items. Practiced and prepared, they take focus to execute, but they aren’t the reason that Paris comes to mind.

I read that Simone Biles speculated that the balance beam was more difficult in Paris because the stadium was uncharacteristically quiet. This event, with its incredible required focus, was more difficult because one element was strikingly out of the ordinary.

For us, the difference in the room that makes the balancing more complicated is the generative AI space.

Don’t get me wrong, the energy on this has been far from quiet. This space has injected high scoring elements to our metaphorical beam routine over the last year; however, if it goes quiet, the balancing act will get more difficult. The marketplace is shifting its attention toward the balance between capital investment and the ability of companies to produce returns on that investment. Over time, we expect the market to raise the bar for these technology companies to show revenue outcomes in relation to spending. Because the concentration of these technology names in indexes is at all-time highs - at current valuations and market index weights- every wobble will stand out.

While a typical economic cycle prompts us to be on the look-out for a recession, there have been instances where markets were able to skip a recession and move back into expansion. In other words, it’s possible to dismount this balancing act without falling. When it comes to the management of portfolios, we remain focused on the execution of the entire event with the goal of sticking the landing.

The S&P 500 Index is a market capitalization-weighted stock index. It is comprised of about 500 stocks of the largest capitalization companies that are traded on U.S. stock exchanges.
The MSCI ACWI Net Index measures the performance of large and mid-cap companies across 23 Developed Markets and 27 Emerging Markets. The MSCI ACWI® Net Index subtracts foreign taxes applicable to US citizens.
The Bloomberg US Aggregate Bond Index measures the return of investment grade debt across the US market.
All returns are reported assuming that interest, capital gains, and dividends are reinvested.
Past performance is not indicative of future results.

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