Global stock markets finished another quarter on a strong note. The S&P 500 Index rose 5.9% while the Dow Jones Industrial Average rose 8.7%. The NASDAQ composite appreciated 2.7%. The MSCI All Country World Index rose 6.7% with the Bloomberg U.S. Aggregate Bond Index rising 5.1%. U.S. Treasury rates fell broadly even as the yield curve remains inverted, albeit far less than earlier in 2024. The ten-year Treasury yield at 3.78% was 61 basis points lower at quarter-end versus the prior quarter while the two-year Treasury yield at 3.64% fell 111 basis points.

Our view has not changed, despite the significant rally in bonds in 2024, the treasury curve inversion continues to bode poorly for the economy into 2025. The three-month U.S.T bill at a yield of 4.63% is 85 basis points higher than the 10-year U.S. Treasury note (narrowing 18 basis points from last quarter), historically a sign of a forthcoming recession. So far, this time has been different with no recession on the horizon. But signs abound that the economy is slowing.

The Federal Reserve’s move was indeed to lower interest rates. Although we had believed the timing would be after the election. But alas, they moved 50 basis points in September. Now the markets are looking for another reduction at each of the next two 2024 (November and December) meetings with expectations of 75 to 100 basis points in total. We are now inclined to believe at most 25 basis points at each meeting, data depending of course. Rising levels of inflation appear to have abated although the current levels are far higher than the FOMC’s target of two percent. That target is unlikely to be seen either later this year or in 2025. We have yet to see, in the face of today’s rate of inflation, if the FOMC’s tight policy over the course of the past two years ‘broke’ something. Could this mean a ‘soft landing’ for the US economy is still in the offing? For the balance of 2024 and then into 2025, that is yet to be determined.

The fourth quarter of 2024 is already bringing challenges to the economy and the markets. The leading cause will be the anticipation of the election outcome thisNovember together with a slowing economy and marginally higher unemployment.

We continue to believe market volatility in the remaining months of 2024 will be one of 2024’s legacies. Even in the third quarter of 2024, market volatility was obscured as many of the global equity markets hit new highs regularly. We continue to be concerned about a global equity and fixed income market correction of even more substance and more longevity than occurred so far in 2024. Valuations, particularly those that are specifically technology related, are even more elevated today than they were just last quarter.

While fixed income rates have fallen dramatically this quarter, the interest rate spread between investment and non-investment grade securities has gotten even more historically narrow, still not reflecting realities in today’s or the 2025 economy. The dollar ended the quarter weaker against world currencies versus the end of last quarter.

The impact of the war in Ukraine continues to confound the west, many have grown not only complacent in how this impacts the global economy today/tomorrow, but have gotten tired of this war and may look for an ‘easy’ exit with the incoming US Administration. Middle east violence continues to ratchet up with little hope of it being settled in the months to come. Expansion of this violence is beginning to involve more countries; we can only hope it doesn’t escalate and broaden out even further. The human and economic tragedies globally are reminiscent of past periods of violence and war. These horrors continue to reverberate around the world, caution is warranted even more today than earlier this year.

Our continuing search for and investment in undervalued assets requires patience and a healthy dose of optimism for humanity.

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