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<\/figure>\n\n\n\nAs we exit the third quarter, many global assets are positive in performance with some exceeding record levels on a recurring basis. The S&P 500 has hit several all-time highs this year alone, international stocks have returns in the teens for 2024, bonds are up year to date after a positive 2023, cash-like holdings are still providing some level of income with a high degree of safety, and an alternative asset like gold is up over 20% for the year. For the most part, 2024 has been a good time to be an asset owner.<\/p>\n\n\n\n
Why is this? Well, there is an increasing opinion that the economy is finding its \u201cGoldilocks\u201d scenario. As you may know, Goldilocks and the Three Bears is a fairy tale that includes a person finding food and a bed that are \u201cjust right.\u201d In economic terms, a Goldilocks situation is one that includes economic growth, controlled inflation, a supportive Federal Reserve, and a resilient job market.<\/p>\n\n\n\n
The most widely used measure of our economy, US GDP, showed recent growth at 3% annualized. Inflation, the main issue in the economy since 2022, is moderating toward the targeted rate of 2%. The Federal Reserve, after the fastest rate increases in history, announced their first interest rate cut in September. Lastly, the job market has cooled a bit but is still growing and unemployment remains below historical averages. Based on the description of the Goldilocks economy, the current US economy would seem to be very fitting with that scenario.<\/p>\n\n\n\n
Now, as investors, the issues are not so much with what is, but more what will be. If the Goldilocks economy is currently resting in the \u201cjust right\u201d bed, the question is whether the sleep will be disrupted by bears and result in a need to jump out the window to escape?<\/p>\n\n\n\n
In the short term, our opinion is that the Goldilocks scenario can sustain. For the bond market, Federal Reserve interest rate cuts are typically a tailwind for bond price performance, though this is not always perfectly consistent. For the stock market, corporate earnings have remained strong and estimates are for double digit growth in 2025. It is our opinion that earnings growth, over the long term, is the best predictor of future stock market growth. Even earnings growth, however, is rarely a consistent predictor of returns on a yearly basis. Lastly, the fourth quarter is historically the best quarter of stock market performance.<\/p>\n\n\n\n
The markets, however, often experience levels of turbulence and decline. Even if you believe the US market is in a Goldilocks scenario, sentiment in the markets and economic conditions can shift quickly and unexpectedly. For example, the bond market yields have recently \u201cun-inverted\u201d after being inverted for over two years. Historically, this condition has preceded recessions. Jobs have been resilient, but recent indicators suggest levels of slowing that, in the past, have also preceded recessions. There are two active wars currently ongoing where the conflicts seem to be escalating. Lastly, the US is about to conduct an election that could influence future tax policy and economic initiatives that affect both consumers and businesses.<\/p>\n\n\n\n
Therefore, we would encourage investors to exercise some level of restraint against taking excessive risk without some level of protection. When the stock market is rising like it has since late 2023, it can be very tempting to shun lower return assets to buy riskier assets that appear to be going up on a daily basis. This return-chasing can produce results for a time, but often it leads to an overabundance of portfolio risk and losses that exceed the level of tolerance. These declines can often be very swift and lead to irrational and emotional \u201cfire sales\u201d of assets that keep investors on the flywheel of buying high and selling low.<\/p>\n\n\n\n