October 29, 2024 Letter to Clients

As we write this quarter’s letter, the leaves are falling, temperatures are (rather slowing) dropping, and inflation is showing signs of easing.  This follows the aggressive Federal Reserve (the Fed) policy that maintained interest rates at 5.25%-5.50% throughout the year. Just last month, however, the Fed made a major move with a significant rate cut of half a percentage point, signaling to the market that substantial progress has been made in reducing the rampant inflation.  

While we’re optimistic about the economy's health (regardless of election outcomes), we also maintain a sense of caution and humility. The biggest market surprises often occur when expectations don’t match reality. Historically, rate-cutting cycles have responded to troubled economies, like during the global financial crisis, however this time is different; the Fed has indicated that this cycle aims to maintain a healthy economic equilibrium. We maintain a hawkish eye on the data as it is announced however, especially given that core inflation, which excludes food and energy prices, experienced a recent uptick.  

Changing Electoral Dynamics & Market Impact  

The landscape of the presidential contest shifted with President Biden’s departure from the race, and what remains unclear is the implications for down-ballot races, particularly in the House and Senate. This fall, one-third of the U.S. Senate seats (currently held by a narrow Democratic majority) and all 435 House of Representative seats (under narrow Republican control) are up for election. In these closely contested races, even a small margin could determine control of both houses of Congress and the presidency starting in 2025, with outcomes difficult to predict. It remains to be seen if one party will control both or a split will remain as there is today. History shows us that the most significant policy advancements happen when one party holds the White House and both chambers of Congress. Based on current polls, we're still a long way from that scenario. 

Market reaction to the election and tax policy are commonly the biggest concern for investors. Our presidential candidates have put forth a wide variety of federal tax proposals that could significantly impact the tax landscape for individuals, businesses and estates. Tax policy has drawn significant attention this election cycle with one area of particular interest being the provisions of the Tax Cut & Jobs Act (TCJA) that are set to sunset in 2025. If provisions are extended, keeping tax rates lower, along with additional tax breaks proposed, the concern is that this plan will ignite budget deficit concerns. If some or all provisions of the TCJA are not extended however, tax rates could be higher for up to 60% of tax filers, along with impact to other provisions including the estate and gift tax. It is important to keep in mind that the tax proposals would need to pass through Congress to be enacted, but it is worth being aware of what each candidate proposes, particularly if one party will control both the White House and Congress.  

With the 2024 election still in flux, it’s important to remember that historically presidential elections have had very little impact on the markets. Market performance is more likely to be driven by economic fundamentals, such as corporate earnings, interest rates, and consumer spending.  

In an election season marked by surprises, it’s natural to question how this uncertainty might affect financial markets. With strong emotions on both sides, many investors anticipate that ongoing news and the election outcome will lead to volatility and influence stock prices. Historically, financial markets have remained relatively stable during presidential elections. 

While it may be tempting to attribute any current market volatility to the political landscape, political current events historically cause short-term fluctuations and in the long run, stock and bond returns are more closely tied to fundamentals. It is for this reason that we rely more on our vast experience and professional resources, sound data, as well as economic fundamentals and policy, rather than what candidate takes office. A look back at past presidential elections shows us that they themselves are not notable market moving events, therefore making significant changes in a portfolio simply because of an election can backfire for a long-term investor.  

It is a common myth that one party or the other is “better” for the stock market and while it remains an argument as old as time, the reality is that historical data just does not support this theory. There hasn’t been a strong relationship between Election Day outcomes and how the markets perform there on out. In fact, a divided government has correlated with stronger market returns- most likely because a divided government creates gridlock with less policy change taking place. Another reason not to position portfolios based solely on election outcomes is because what is promised on the campaign trail typically becomes a very watered-down reality, if ever enacted. A look back on campaign policy promises shows us that is very rare that a candidate will deliver exactly what they proposed once they take office.   

Angst surrounding the upcoming election is understandable but is not enough to make a drastic shift to the plan for your long-term investments. Remaining focused on our client’s goals, their time horizon and risk tolerance, as well as other considerations unique to our client’s situation is what we remain focused on.  

Interest Rate Outlook  

As we write this letter, we have seen an uptick in the 10-year Treasury yield, signaling investor nervousness about looming federal fiscal deficits. Under current tax and spending laws, it is estimated the deficits will average 6% of GDP over the next 10 years. Campaign promises by both Vice President Harris and former President Trump promise to threaten to cause that number to increase. If this should come to fruition, this may cause the Fed to cut short-term interest rates slower than the markets are anticipating. However, as we mentioned earlier many campaign promises go unfilled or become a very water-down reality.  

The Fed is expected to still cut its benchmark rate in both November and December, but unlike the more aggressive half-percent last month that brought the rate down to 4.75% from 5.25%, the markets are anticipating more gradual quarter-point cuts in the months ahead and into 2026, unless of course the economy shows worrisome signs of slowing, and in that case all bets are off for rate cuts.  

Bonds have an inverse relationship to interest rates.  When interest rates rise, bond prices usually fall, and vice versa. Most bonds pay a fixed interest rate, so existing bonds become more attractive if interest rates fall because the newly issued bonds are paying less interest, thus driving up demand for existing higher interest paying bonds and increasing their market value.  

Even in a monetary easing cycle with rates declining, bonds still play a vital role in a well-balanced portfolio as they provide income, total return and diversify against other asset classes.  

CD Maturity Tsunami  

We are currently experiencing a CD “maturity tsunami," with $950 billion in CDs maturing right about now and an additional $2.5 trillion due over the next year. If you locked in a high-interest rate last year, you may soon receive notices from your bank about your CD's maturity date.  

It’s essential to know the maturity date and your bank’s grace period policy, as it will vary from bank to bank. While automatic renewal may seem convenient, it often leads to lower rates than you could secure with a new term, so it is wise to stay in control of your funds than to leave them to the bank’s discretion. This is also a good time to assess how best to use your cash. Although interest rates have recently dropped, CDs are still offering attractive rates compared to most traditional savings accounts. Be cautious not to allocate too much cash to CDs and keep a healthy balance of funds accessible for short-term needs and emergencies. While you can typically access your CD early, penalties apply. CDs are continuing to present as a good option for surplus savings you don’t need readily accessible in a savings account but also do not want in the stock market currently.  If you're uncertain about how to proceed with your maturing CD, we’re here to help you determine the best strategy for your situation, be it savings, CDs, debt payoff, or putting money in the stock market.  

As we enter the final weeks of the election and the days following, coupled with an upcoming change of President in the White House, one thing remains constant and that is our continued commitment and focus on our client’s needs and best interests. As has been mentioned before, you may be confident that as the financial markets and economy evolve, as they have done many, many times before, and the new political landscape takes shape, we will continue to actively manage our portfolios in a conscientious manner, relying on experience, expertise, and continuing research to guide our clients through a changing landscape.  

We encourage those who may have significant changes coming in the new year to reach out to schedule a time to discuss and plan. And for those who we do not have the opportunity to speak with beforehand, we wish you and your families a wonderful start to the holiday season and may it be full of good health and cheer. 

Best Regards, 

Steve LePage Colleen Bianco