Quarterly Review

A view down the pier boardwalk on a beautiful summer day by the Long Island Sound at Calf Pasture Beach in Norwalk, Connecticut USA

July 9 2025

Second Quarter 2025 Review and Commentary

July 9, 2025

Robert Bingham, CFA, President and Chief Investment Officer
John Wright, Principal, Senior Portfolio Manager
Jared Soper, Senior Portfolio Manager
Tyler Waterman, Director of Research, Portfolio Manager

“We do not know the scope and breadth of the tariff issue at the moment and will not for a while. Accordingly, anything I might say on that subject will be sheer speculation.”

– Phebe Novakovic, CEO of General Dynamics (on first quarter earnings call)

The second quarter of 2025 was a challenging period for executives as they attempted to dissect a litany of Liberation Day tariff announcements and inform investors of the new tariffs’ potential impact on future earnings. Further compounding the issue – the White House implemented a 90-day delay on the rollout of these tariffs a week after Liberation Day in an attempt to quickly bring foreign leaders to the negotiating table. On July 7^th, that delay was extended from July 9^th to August 1^st. In addition, over a dozen letters were sent out to select trading partners, including Japan and South Korea, threatening to increase tariff rates by 25% to 40% if a deal wasn’t struck before the new deadline.

Companies addressed the potential effect of tariffs in a variety of ways on their first quarter earnings calls – either by withdrawing guidance entirely, by providing guidance with and without tariff impacts, or by offering specific plans to fully offset tariffs, such as supply-chain adjustments and/or price increases. The consensus seemed to be that the 10% tariff baseline is here to stay, while the reciprocal tariffs on top of that are likely to be negotiated down (with some exceptions).

Despite elevated volatility at the start of the second quarter, the stock market was once again resilient, driven in part by the aforementioned delay of Liberation Day tariffs. The market-cap weighted S&P 500 Index bounced back from a total return of -4.3% in the first quarter to a total return of +6.2% through the end of June, led by the technology sector. The Dow Jones and Nasdaq Composite finished the second quarter with year-to-date total returns of +4.5% and +5.9% respectively. The Russell 2000 Index, which measures the performance of smaller, less profitable companies, finished the first half with a total return of -1.8%.

The 10-year U.S. Treasury ended the quarter with a yield of 4.2%, down from 4.6% at the start of the year and flat quarter over quarter. The 10-year has largely remained range-bound between 4.2% and 4.6% through 2025. On the short end, the 2-year U.S. Treasury ended the quarter with a yield of 3.7%, down from 3.9% at the end of the first quarter. The 2-year yield has trended downward since it peaked at over 5% in the fall of 2023, reflecting expectations for continued interest rate cuts by the Federal Reserve.

Gold stood out as one of the best performing asset classes this year with a gain of over 26% through June 30^th, its best first half performance in 46 years. Global central banks have been contributing to the rise in the price of gold as they continue to ramp up their purchase activity. Lawson Winder, research analyst at Bank of America, commented in a note, “we think central banks are buying gold to diversify reserves, reduce reliance on the [dollar], and hedge against inflation and economic uncertainty.” He added that this is, “a trend that we think is set to continue, especially amid uncertainty surrounding U.S. tariffs and fiscal deficit concerns.”

Gold was a stark counterpoint to the U.S. dollar, which fell over 10% through the first half of the year, relative to a basket of other currencies such as the euro and yen, for its worst performance in over 50 years. That may sound dramatic, but bear in mind the decline is coming off the heels of a 10% rally in the dollar from October of 2024 to January of 2025. The divergent performance of the U.S. dollar and gold through the first half can be seen in the chart below.

Gold versus U.S. Dollar 2025 Performance through June 30th

A weaker dollar helps the Trump administration’s efforts to improve U.S. trade imbalances, since the costs of U.S. goods are less for foreign importers. U.S. multinational companies will also benefit as over 40% of S&P 500 revenue comes from overseas. A number of companies, such as Adobe and Zoetis, increased their guidance last quarter, in part due to more favorable foreign exchange rates.

Investors have been dumping the dollar in favor of other assets such as gold. The move is the result of a combination of factors, including U.S. policy uncertainty, the potential for higher inflation and/or lower interest rates and a growing U.S. deficit, which is expected to be $2 trillion in 2025.

While there are many Wall Street economists and analysts that have sounded the alarm on the ever-increasing U.S. national debt, Steve Eisman, who is renowned for calling the U.S. housing bubble collapse in 2007/2008, does not count himself among them. Mr. Eisman recently appeared on CNBC and was asked about his level of concern regarding the risk surrounding the U.S. budget deficit. He responded that, “the price of this risk is the 10-year Treasury yield, and what’s happened to the 10-year Treasury yield? It’s been directionless since December of 2022. So, the more important question is…why hasn’t it moved? I think the reason is there’s no alternative to Treasuries…As long as there’s no alternative, there’s nothing to talk about.”

A chart of the 10-year Treasury yield from January 1, 2023 to June 30^th, 2025 can be seen below. While a number of events have caused yields to rise or fall, the overall trajectory has been sideways.

The Trump administration has taken steps this year to slow the growth of the U.S. deficit. The newly established Department of Government Efficiency (DOGE) and the new tariff policies were steps taken to reduce the deficit. President Trump’s tariffs are beginning to generate significant revenue as the Treasury reported gross customs duties of $22.8 billion in May, up from $6.2 billion in the prior year. The total through the first five months of the year is $63.4 billion with the upcoming June report from the Treasury expected to show further increases from May levels. Despite these efforts, the deficit is expected to increase from the prior year given government spending increases, greater interest payments on Federal debt and a lack of any income tax increases.

Another avenue for combating the elevated deficit would be to reduce interest payments on U.S. government debt by lowering interest rates, an idea that appeals to President Trump. The President has regularly criticized Federal Reserve Chair Jerome Powell for being “too slow” to cut interest rates while believing, “we should be at 1% or 2%,” versus the current target range of 4.25% to 4.50%.

Mr. Powell prefers a wait-and-see approach as economic data evolves and as the impact of new tariff policies and their ultimate levels are understood. The Federal Open Market Committee (FOMC) primarily considers inflation and employment data when choosing to increase or cut interest rates. Inflation has remained low despite pressure from tariffs, which supports the notion that the FOMC has a green light to cut rates. However, unemployment has also remained low at around 4.1%, leaving FOMC members in no rush to make a decision. Fed Governors Michelle Bowman and Christopher Waller have indicated that they would prefer a rate cut in July as long as inflation data remains favorable.

In the face of these puts and takes, the market reached a new all-time high on July 3^rd. Investors to date have looked past all the noise and focused on corporate earnings growth and margin expansion. Momentum in the market’s cyclical sectors like technology, financials and industrials has been red-hot, but there are still attractive pockets of value in more defensive sectors like healthcare. We continue to be long-term holders of high-quality companies and aim to be opportunistic on any weakness in secular growth companies.

We invite you all to reach out with any questions and do hope you enjoy the summer.

Securities noted above valued as of the market close on July 9, 2025:

Adobe Inc. (ADBE $373.38)

Zoetis Inc. (ZTS $158.27)

These summary/prices/quotes/statistics contained herein have been obtained from sources believed to be reliable but are not necessarily complete and cannot be guaranteed. Errors and omissions excepted.

This is not a general recommendation to buy or sell any particular security. Such advice is given to each of our clients individually based on their particular financial goals and objectives, risk tolerance and investment experience. For advice regarding your individual portfolio, please contact your investment manager. The information displayed here is limited to the dissemination of general information on products and services and transactions cannot be completed via this website.

Black Point Beach, Niantic, East Lyme, Connecticut blue hour with a pastel sky and clouds view across the water with pink and purple reflections on the sea, July 2018.

April 10 2025

First Quarter 2025 Review and Commentary

abigail@analytive.com Quarterly Review

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April 10, 2025

“As soon as you realize you can afford to wait out any correction, the calamity also becomes an opportunity to pick up bargains.”
– Peter Lynch, former manager of Fidelity’s Magellan Fund

In our prior quarterly commentary, we pointed to extremely elevated valuations in a number of high-momentum, high-growth stocks due to increasing optimism in the market following the 2024 election. Promises of lower taxes and deregulation have quickly become overshadowed by an increasing probability that the US will experience a global trade war and a recession.

Strategist Ed Yardeni increased his predicted likelihood of a recession/stagflation scenario playing out from 20% to 45% over the course of the quarter, in part due to the large degree of uncertainty caused by recent tariff announcements. Large financial institutions also increased the probability of a recession hitting the US: JP Morgan from 40% to 60%, Goldman Sachs from 20% to 35%, S&P Global from 25% to 30-35%, and Moody’s from 15% to 40%. As of April 8th, the expected probability of a recession had risen to 42.5% from 24% earlier in the year.

Unsurprisingly, Wall Street strategists’ year-end estimates for the S&P 500, shown in the table below, also declined throughout the quarter from a peak of 6,614 in December. We would expect estimates to be lower in mid-April when the next set of data is released.

First Quarter 2025 Review and Commentary

The S&P 500 Index fell 4.3% during the first quarter of 2025 when including dividends. The index briefly touched correction territory over the course of the quarter, defined as a decline of 10% or greater from recent highs, but not exceeding 20%. The decline was largely led by Magnificent 7* stocks and other high-momentum constituents. The Equal-Weight S&P Index fared better, falling 0.6% during the same period when including dividends.

This trend was more pronounced in the tech-heavy Nasdaq Composite Index and Russell 2000 Index, which saw total returns of -10.3% and -9.5% respectively as investors rotated into more defensive positions. Bonds outperformed during the first quarter as the yield on the 10-year Treasury fell from 4.6% to 4.2%. Gold was up 19% while Bitcoin fell 11.7%.

No more than one week after the end of the first quarter, we find ourselves digesting major tariff announcements that make the happenings of the prior three months seem almost irrelevant. After the market close on April 2nd, President Donald Trump revealed his plans for improving trade imbalances between the United States and international trading partners via reciprocal tariffs on imports coming into this country.

While there had been rumors from White House aides leading up to the announcement that tariffs could be capped at 20%, the reality proved far more severe. A 10% minimum tariff, set to go into effect on April 5th, was applied to every country across the board. However, many countries found themselves hit by tariffs that were far greater than even the most pessimistic of expectations. Noteworthy reciprocal tariffs include China at 34% (on top of previously announced 20% tariffs earlier in the year), the European Union at 20%, Taiwan at 32%, and Vietnam at 46%. The announcement on April 2nd was in addition to a 25% tariff that had been placed on Canadian and Mexican imports earlier in the year, a 25% tariff on aluminum and steel imports, and a 25% tariff on automobile imports.
Dan Ives, Wedbush global head of technology research, tweeted “We would characterize this slate of tariffs as ‘worse than the worst-case scenario’ the Street was fearing. The biggest focus will be the China 34% tariff and Taiwan 32% and how this impacts supply chain and demand. Negotiations [are] the only option at this point for White House.” Mr. Ives joins a chorus of analysts decrying the audaciousness of the new tariffs and warning that the US is in for much more economic pain if they persist for the long term.

The methodology used to calculate the long list of reciprocal tariffs remains somewhat of a mystery. The tariffs seem to be partially based on the overall trade deficit the US has with other countries, rather than a response to the tariffs those countries have implemented. For instance, President Trump’s list revealed that Vietnam is currently charging 90% tariffs on US exports, but none of their tariffs come close to that number. The 90% is more likely to represent the trade deficit, as Vietnam imported $13.1 billion of goods from the US in 2024 versus $136.6 billion exported. The $123.5 billion deficit is approximately 90% of $136.6 billion. Non-tariff barriers were also taken into consideration, such as Australia forbidding the purchase of US beef.

One of the stated goals of the Trump administration’s trade policy is to re-ignite domestic manufacturing and bring more production facilities onshore. In his April 2nd speech, coined “Liberation Day,” President Trump highlighted some of the large commitments companies had made to build plants and expand manufacturing capacity in the United States. He noted that, “Apple is going to spend 500 billion dollars…They’re going to build their plants here. SoftBank, OpenAI and Oracle… are investing 500 billion dollars almost immediately. Nvidia… is investing hundreds of billions of dollars they just announced. TSMC… is investing 200 billion.”

If companies choose not to bring manufacturing onshore, they may be stuck paying hefty tariffs to continue importing goods. President Trump also sees this as a win, because the tariffs would generate revenue for the US government. This additional revenue could be used to decrease the budget deficit. Even at the baseline 10% level, if total goods imports were to remain around the current $3.3 trillion level, that would equal roughly $330 billion of revenue. The chart below highlights some of the US’s largest trading partners and the dollar value of imports entering our country.

On the other hand, if companies are forced to pay higher prices for imports, there is a high probability that they will attempt to pass those higher costs on to consumers. This would lead to higher inflation, which when coupled with lower economic growth from reduced trade and investment, could lead to stagflation. This sentiment was echoed recently by Fed Chair Jerome Powell at a conference: “While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”

President Trump has indicated on several occasions that he wants Jerome Powell’s Fed to cut interest rates, though that seems unlikely given the most recent strong jobs report and ongoing inflation rates. However, that data reflect the state of the economy before tariffs went into effect. If restrictive tariffs lead to a US recession, that could pave the way for interest rate cuts.

The government’s attempts to reduce the $36.2 trillion national debt have been a two-pronged attack. While the freshly-announced tariffs are focused on increasing revenue, Elon Musk and his Department of Government Efficiency (DOGE) have focused on reducing government waste and spending.

According to the DOGE website, approximately $140 billion in savings have been realized thus far through their cost-cutting efforts. The website contains a “wall of receipts” that tabulate all of the cuts to government contracts, grants, and leases. Unfortunately, these receipts only make up about 30% of the $140 billion figure, so it is unclear where the bulk of the savings comes from. Other categories for savings include asset sales, interest savings, programmatic changes, regulatory savings and workforce reductions.

Critics of Elon Musk and DOGE have been quick to identify errors and overstatements of some savings figures. For instance, there have been times when the ceiling value of an indefinite delivery/indefinite quantity (IDIQ) contract was reported as savings, even though the actual spending was well below the ceiling amount. This would be similar to canceling a credit card with a $10,000 credit limit, but with only $1,000 of current debt outstanding and calling it $10,000 in savings. Mr. Musk has admitted that he will make mistakes and “nobody’s going to bat a thousand.”

Market volatility will likely persist, but it should moderate over time. Strong management teams should be expected to strategically re-align their businesses to adapt to the new paradigm. Apple’s decision to temporarily replace imports from China with product from India is an example of such a shift.

In the face of heightened volatility, our mantra remains the same: Buy high-quality companies when they are attractively priced. The sharp downturn since the beginning of the second quarter made valuations that much more attractive than at quarter end. Corporations will also release earnings for the first quarter and guidance for the balance of the year, giving us the opportunity to re-evaluate earnings growth, cash flows and the likelihood of a recession.

Do please let us know if you would like to meet with us in person or speak with us directly.

* Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla comprise the Magnificent 7.

Securities noted above valued as of the market close on April 9, 2025:

Alphabet Inc. Cl A (GOOGL $158.71)
Amazon.com Inc. (AMZN $191.10)
Apple Inc. (AAPL $198.85)
The Goldman Sachs Group, Incl (GS $516.87)
JPMorgan Chase & Co. (JPM $234.34)
Meta Platforms Inc. (META $585.77)
Microsoft Corp. (MSFT $390.49)
Moody’s Corporation (MCO $438.59)
NVIDIA Corporation (NVDA $114.33
Oracle Corporation (ORCL $139.69)
S&P Global Inc. (SPGI $473.99)
SoftBank Corp.- ADR (SOBKY $14.16)
Taiwan Semiconductor Manufacturing Company, Ltd. (TSM $158.75)
Tesla Inc. (TSLA $272.20)

Breakwater at Harvey's Beach in Connecticut at sunset on a cloudless day

February 4 2025

Fourth Quarter 2024 Review and Commentary

abigail@analytive.com Quarterly Review

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January 7, 2025

Robert Bingham, CFA, President and Chief Investment Officer
John Wright, Principal
Jared Soper, Senior Portfolio Manager
Tyler Waterman, Portfolio Manager, Director of Research

“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic.”
– John Maynard Keynes

“Animal spirits” is a term coined by John Maynard Keynes to describe the tendency for human emotions to influence stock market gains and losses, rather than the intrinsic value of the underlying investment. The “fear of missing out,” or “FOMO,” is a state of mind that can lead investors to pile into high-momentum investments with recent outperformance. We saw this phenomenon occur in the fourth quarter as “risk-on” assets like the “Magnificent 7*” stocks, illustrated in the chart below, and cryptocurrencies, generated huge returns in the aftermath of the election. Investors are anticipating that policies from the incoming Trump administration, such as lower taxes and deregulation, will lead to continued market strength and earnings growth in 2025.

Of the stocks that comprise the Magnificent 7, none stood out more than Tesla in the fourth quarter, which saw its market capitalization increase 54% or nearly half a trillion dollars. Some investors may be expecting some form of quid pro quo for the hundreds of millions of dollars Tesla CEO Elon Musk poured into the 2024 election. The narrative has become more important than the underlying fundamentals, and whether we choose to call it animal spirits, irrational exuberance, FOMO, or spontaneous optimism – we believe this is a company that needs to significantly grow earnings over the next decade in order to justify its $1.3 trillion valuation and a forward price-to-earnings (P/E) multiple of 150. After becoming a close ally of President-elect Trump, and with a newfound position leading the Department of Government Efficiency (DOGE) alongside Vivek Ramaswamy, some investors have confidence that Musk has the power to meet these high expectations. Time will tell.

However high expectations and momentum are not unique to Tesla and the Magnificent 7. Take Palantir, for example, a technology company focused on providing software solutions to the intelligence community. Palantir was the top gainer in the S&P 500 last year, starting the year with a market capitalization of $38 billion and ending the year at over $170 billion. That’s a gain of over 340%, despite estimated earnings growth of 52% for 2024 and 25% for 2025. It now trades at a staggering price-to-sales ratio of around 63 and a forward P/E ratio of nearly 200. Palantir’s remarkable performance is a testament to the power of momentum in investing, a strategy that has significantly outperformed broader diversification over the past year and a half, as shown in the figure below.

Fourth Quarter 2024 Review and Commentary

We would be remiss if we did not mention that extended periods of positive stock momentum and earnings-multiple expansion may ultimately result in large, rapid drawdowns, such as the sell-off following the late 1990s Bull Market. In 2022, Meta Platforms, Netflix, and Tesla all saw declines in excess of 70% from their 2021 peak to their trough. Nvidia lost two thirds of its market cap and Amazon lost over half. Federal Reserve Governor Lisa Cook recently echoed the concern that valuations are elevated, stating, “markets may be priced to perfection and, therefore, susceptible to large declines, which could result from bad economic news or a change in investor sentiment.”

The S&P 500 index capped another strong year with a total return including dividends of +25.0%, nearly doubling the total return of the equal weight S&P 500 index, which came in at +13.0%. The Russell 2000 underperformed both indices at +11.5% while the Dow Jones fell in between at +15.0% total return. Gold and Bitcoin also had very strong years, advancing 26% and 121% respectively.

The yield on 2-year US Treasuries was 4.2% at the close of the year, down modestly from 4.3% to start the year and up from 3.6% at the end of the third quarter. The 10-year US Treasury bond yield increased from 4.1% at the start of 2024 and 3.8% at the end of the third quarter to 4.8%. 30-year mortgage rates remain elevated at around 7%, reflecting the increase in longer term interest rates.

Since the end of the third quarter, the Federal Open Market Committee (FOMC) has cut the federal funds rate (FFR) by an additional 50 basis points (bps) – a 25 basis point cut in November and a subsequent 25 basis point cut in December. This brings the total rate cut for the year to 100 bps, or a full percentage point, and has resulted in a new FFR target range of 4.25%-4.50%.

Both rate cuts were widely anticipated, but the S&P 500 declined nearly 3% following the announcement in December – its largest drop since August 5^th. The decline was largely due to a change in forecasts for rate cut activity going forward. The median projection for rate cuts in 2025 now stands at two 25 basis point cuts, down from four projected at the September meeting.

At his December 18^th press conference, Fed Chair Jerome Powell addressed the drivers of the slower rate cut path during the Q&A: “First thing is growth is stronger, right? The economy grew faster in the second half of 2024, so far, than we had expected, and is expected to be above our expectations in September next year as well. Unemployment is lower, and in the (Summary of Economic Projections), you’ll see that participants think that the downside risks are less and uncertainty is less at the end, so that’s more strength, right? Inflation is higher, as we talked about, inflation’s higher this year, it’s also higher in the forecast next year. I’d also point out that we’re closer to the neutral rate, which is another reason to be cautious about further moves.”

In a nutshell, further rate cuts are on hold until there is more certainty on the direction in which inflation is headed. That uncertainty is compounded by the fact that a new administration is set to begin implementing its policies in the upcoming weeks, having campaigned on a platform of widespread tariffs and mass deportations. These actions could be inflationary. When questioned on the role the upcoming administration’s policies played in FOMC forecasts, Powell said, “some did identify policy uncertainty as one of the reasons for their writing down more uncertainty around inflation,” and added, “we just don’t know really very much at all about the actual policies, so it’s very premature to try to make any kind of conclusion. We don’t know what’ll be tariffed from what countries, for how long, and what size. We don’t know whether there will be retaliatory tariffs, we don’t know what the transmission of any of that will be into consumer prices.”

Gross domestic product (GDP) was up an annualized 2.8% in the third quarter, in line with second quarter growth. Looking forward, the FOMC projects that GDP growth will remain solid, with a median projection of 2% over the next few years. They also anticipate 4.3% unemployment over that timeframe and 2.5% personal consumption expenditure (PCE) inflation in 2025. Factset consensus calls for S&P 500 earnings growth of 15% in 2025.

So what is helping drive predictions for strong earnings growth in US equities, outside the expected policy shift from the Trump administration? Many would point to the potential for continued productivity gains, a domain in which the US has long maintained a leading role, largely due to the success of US technology companies and more recently, artificial intelligence. In his article “The U.S. Needs a Productivity Miracle. It Might Just Get One,” Wall Street Journal author Aaron Back wrote, “When productivity is booming, it allows the economy to expand faster without triggering inflation.” He further noted, “Preliminary estimates from the Bureau of Labor Statistics show that total nonfarm business sector labor productivity increased 2.0% from a year earlier in the third quarter – the fifth straight quarter of growth at or above 2%. That is significant as the average rate of growth for the five years before the pandemic was 1.6%.” We see this trend continuing and accelerating as US companies continue to invest in AI and automation.

Investment strategist Ed Yardeni shares a similar view, assigning a 55% probability that the US enters a bullish, “Roaring 2020s” scenario, with rapid growth in the latter half of the decade driven in part by productivity improvements. Yardeni commented in December that, “we are expecting productivity growth to accelerate toward 3.0%-3.5% over the rest of this decade, driving real GDP higher even as a slowdown in labor force growth causes hours worked to increase only marginally.” Yardeni has compared the present environment to periods before prior productivity peaks in the 1950s (interstate highway buildout), 1960s (mainframes), and the late 1990s (internet/PCs).

We’ve seen companies such as Coca-Cola and Toys ‘R’ Us experiment with generative artificial intelligence (GenAI) in marketing this year with a reasonable degree of success. The use of GenAI allowed these companies to produce ad campaigns at a lower cost and reduced their time to market. Artificial intelligence has also been used to reduce labor costs and/or improve outcomes in areas such as customer service, cybersecurity and drug discovery. There is certainly more to come.

As 2025 begins, we remain cautiously optimistic about this year’s prospects. Earnings trends seem encouraging, productivity gains should continue, and stock valuations may hold up if corporate earnings materialize as expected. However, uncertainties are always with us, and inflation trends need to decline. Certainly, the California wildfires, rising insurance costs, and wars remain current concerns. Rich stock valuations could be vulnerable to negative surprises.

At SKY, we’ll continue to embrace diversification to offset surprises and prospective risks. We’ll continue to focus on an investment’s intrinsic value and to assess the outstanding risks and opportunities. While it’s unlikely that the S&P will appreciate by another 20% this year, we believe investors should feel comfortable staying invested for the long term.

As always, we value your trust and confidence in SKY Investment Group and are committed to support you in any way we can. Please let us know if you have any questions or would like to visit.

* Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla comprise the Magnificent 7.

Securities noted above valued as of the market close on January 6, 2024:

Alphabet Inc. Cl A (GOOGL $196.87)
Amazon.com Inc. (AMZN $227.61)
Apple Inc. (AAPL $245.00)
The Coca-Cola Company (KO $60.81)
Meta Platforms Inc. (META $630.20)
Microsoft Corp. (MSFT $427.85)
NVIDIA Corporation (NVDA $149.43)
Palantir Technologies Inc. (PLTR $75.92)
Tesla Inc. (TSLA $411.05)

Overview of beautiful fishing pier after sunset at low tide at Walnut Beach, Milford Connecticut, USA.

October 8 2024

Third Quarter 2024 Review and Commentary

abigail@analytive.com Quarterly Review

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October 8, 2024

Robert Bingham, CFA, President and Chief Investment Officer
John Wright, Principal
Jared Soper, Senior Portfolio Manager
Tyler Waterman, Portfolio Manager, Director of Research

“Progress is impossible without change, and those who cannot change their minds cannot change anything.”
– George Bernard Shaw

The Federal Open Market Committee (FOMC) has certainly changed their minds a few times over the past 3 quarters on how many 25-basis point (bp) rate cuts they project by the end of 2024. Market expectations at the beginning of the year were for 6 quarter-point cuts, then fell to less than 2 in the summer before rising again to around 4 cuts at the end of the third quarter.

Overnight Index Swap (OIS) Implied Number of Quarter-Point Rate Cuts by December

Third Quarter 2024 Review and Commentary

After 11 rate increases from March 2022 to July 2023 and over a year pausing, the FOMC decided to cut the federal funds rate by 50 basis points following the conclusion of their September meeting. The market was anticipating around a 40% chance of a 25 bp cut and a 60% chance of a 50 bp cut a day before the announcement. Interestingly, Fed Governor Michelle Bowman cast a single dissenting vote for a 25 bp cut – the first dissent by a Fed governor since 2005.

The new target range declined from 5.25%-5.50% to 4.75%-5.00%. The Fed now projects that the federal funds rate will be in the target range of 4.25%-4.50% at the end of 2024, implying another 50 basis points of cuts over the next 2 FOMC meetings. They project a further 100 basis points of cuts in 2025, taking the range to 3.25%-3.50% before ultimately hitting the terminal rate of 2.75%-3.00% in 2026. This 3% target is the “neutral” fed funds rate, which in theory is neither stimulative nor restrictive for economic growth. Bear in mind that Fed Chair Jerome Powell indicated in July that a 50-basis point rate cut was not in consideration for September, reminding us that these targets are dynamic and subject to change as new economic data is published.

In fact, a mere two weeks before the September 18th/19th Fed meeting, the market odds of a 50 bp rate cut were closer to 25%. Fed Governor Waller on September 6th commented on the balancing act between aggressively cutting rates versus a slow and steady rate cut cycle: “Determining the appropriate pace at which to reduce policy restrictiveness will be challenging. Choosing a slower pace of rate cuts gives time to gradually assess whether the neutral rate has in fact risen, but at the risk of moving too slowly and putting the labor market at risk. Cutting the policy rate at a faster pace means a greater likelihood of achieving a soft landing but at the risk of overshooting on rate cuts if the neutral rate has in fact risen above its pre-pandemic level. This would cause an undesired loosening of monetary policy.”

The Fed also adjusted their forecasts for Gross Domestic Product (GDP) (2% vs 2.1%), unemployment (4.4% vs 4%), and Personal Consumption Expenditures or PCE inflation (2.6% vs 2.8%) by the end of the year. Powell described the economy as “strong overall” and labor market conditions as “solid, having cooled from their previous overheated state”. On inflation, Powell said “inflation has eased, and my FOMC colleagues and I have greater confidence that it is on a sustainable path to 2 percent.” Many Wall Street analysts are skeptical that inflation will get as low as 2%, but significant progress has been made as indicated by the following chart.

Consumer Price Index – 12-month Percentage Change (not seasonally adjusted)

Equity markets continued to deliver strong performance in the quarter – the S&P 500 was up 5.9%, bringing the total return for the year through September 30th to 22.1%. As anticipated, market strength broadened beyond the Magnificent 7* as the S&P 500 Equal Weight Index was up 9.6% in the quarter, outpacing the market-cap weighted index by 3.7%. The Dow Jones Industrial Index was up 8.7% in the quarter and 13.9% for the year including dividends.

In addition to equity indices, the Bloomberg US Treasury Index had a positive return of 4.7% in the quarter. Two-year Treasury yields dropped from 4.8% to 3.6% and 10-year yields dropped from 4.4% to 3.8%. Gold also hit an all-time high.

The quarter wasn’t without volatility, however. As of September 30th, the S&P 500 closed at plus or minus 1% or greater on 41 trading days in 2024. Nearly half, or 20, of those 1% or greater moves fell in the third quarter, including the biggest selloff of the year on August 5th when the index fell 3%. The large decline was driven by a combination of a Japanese Yen carry-trade being unwound with attendant margin calls, a weak July jobs report and a rise of 0.2% in the unemployment rate.

After the selloff, Dr. Edward Yardeni shared his opinion that, “the selling pressure was not fundamentally driven but driven by overleveraged investors’ need to meet margin calls…In our opinion, the nonfarm payroll report was unduly weak owing to Hurricane Beryl, and employment indicators would rebound in the coming weeks.” Investors who bought the dip were rewarded as the S&P finished over 11% higher from the close on August 5th to the end of September. October 4th’s favorable job growth data supports Yardeni’s positive viewpoint on economic fundamentals.

A new stimulus package introduced by the Chinese government on September 24th also sparked a strong rally in the Hang Seng Index. The index had a total return of 11.6% through September 23rd and finished the quarter up 29.2%. The stimulus package includes interest rate cuts, lower reserve requirement ratios which allow banks to lend more, and greater support for the property markets. The Chinese government is hoping the new stimulus will help China achieve their 5% GDP growth target by the end of the year. US companies with exposure to China also saw a slight bump in share price following the announcement.

Sounds like a whole lot of good news! Mark Zandi, Chief Economist at Moody’s Analytics, commented in late September that “this is among the best performing economies in my 35+ years as an economist. Economic growth is rip-roaring, with real GDP up 3% over the past year. Unemployment is low at near 4%…Inflation is fast closing in on the Fed’s 2% target…House prices have never been higher…Corporate profits are robust, and the stock market is hitting a record high on a seemingly daily basis…There are plenty of threats. But in my time as an economist, the economy has rarely looked better.” Pretty strong words.

Despite all the positive news and commentary, there are a few threats as pointed out in the quote above. New layers of uncertainty include heightened tensions in the Middle East, the hurricanes wreaking havoc and leaving areas of the US under water, rising consumer debt loads, the refinancing of commercial real estate burdens, and of course everyone’s favorite upcoming event: the election. The market has never been a fan of uncertainty, and we would expect to see continued volatility in the fourth quarter at least until November 5th.

We invite you all to reach out with any questions and to enjoy a colorful and bountiful fall season.

* Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla comprise the Magnificent Seven.

Securities noted above valued as of the market close on October 7, 2024:

Alphabet Inc. Cl A (GOOGL $162.98)
Amazon.com Inc. (AMZN $180.80)
Apple Inc. (AAPL $221.69)
Meta Platforms Inc. (META $584.78)
Microsoft Corp. (MSFT $409.54)
NVIDIA Corporation (NVDA $127.72)
Tesla Inc. (TSLA $240.83)

Approaching Blue Hour at Lighthouse Point Park in New Haven, Connecticut, USA.

July 3 2024

Second Quarter 2024 Review and Commentary

abigail@analytive.com Quarterly Review

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July 3, 2024

Robert Bingham, CFA, President and Chief Investment Officer
John Wright, Principal
Jared Soper, Senior Portfolio Manager

“There are two different things pushing stocks around: demand for chips to drive artificial intelligence, and concern about the economy and interest rates.”
– James Mackintosh of the Wall Street Journal on 6/20/24

Just like last year? The first half of 2024 generated strong market returns. The S&P 500 was up 14.5% for the first two quarters versus 15.9% for the first half of 2023 when excluding dividends. In 2024 however, the stronger returns were seen in the first quarter with its 10.2% appreciation versus the S&P 500’s 3.9% gains in this year’s second quarter. In 2023, the S&P 500 appreciated by 7.0% in the first quarter and gained 8.3% in last year’s second quarter.

Last year’s strong first half gains were followed by a 3.6% decline in 2023’s third quarter; but that was after the 3.1% advance last July was erased by a 6.6% decline last August and September. While we expect volatility to return again in this year’s third quarter, we do not believe it will be as severe as that seen last year.

For starters, in 2023, the excitement over artificial intelligence was well placed, but nearly euphoric. This excitement also contrasted with 2023’s ongoing expectations for a recession. The stock market was still recovering from 2022’s severe sell-off and hadn’t yet recovered from its previous all-time highs of January 2022. Recessionary signs were also visible as both household spending and energy use slowed in 2023’s second quarter. Market investors expected interest rates to decline sharply. But, in fact, economic growth continued to be vibrant and was materially stronger in 2023’s third quarter than had been expected. The market needed to recognize that interest rates instead were going to remain higher for longer.

In 2024 the economy has grown much more slowly, but steadier, when compared with 2023. Many investors still expect the Federal Reserve to lower interest rates to support additional economic growth. But the Federal Reserve has remained primarily focused on our country’s inflation rate. Fortunately, as seen in the adjoining graph, the core personal consumption expenditures price index had its smallest increase since 2020.

US Inflation Cools While Consumer Spending Persists

Second Quarter 2024 Review and Commentary

The incremental rate of inflation has slowly been coming down after the sharp increases over the last three years. However, actual prices for goods and services are likely to remain materially higher than what we enjoyed back in 2020.

Consumers and businesses have however been adjusting to these higher prices. Consumers have been utilizing their stimulus savings to keep spending, and companies have benefited from this ongoing demand for both goods and services. Wages are up, and the size of the work force has grown.

Most importantly, demand for labor has remained strong. This demand has kept unemployment levels low while also bringing additional workers into the workforce. These healthy trends are expected to continue and should support ongoing economic growth.

However, market investors still want the Federal Reserve to cut interest rates. In fact, as June ended, traders had priced in a 95% chance of an interest rate reduction by the Federal Reserve during 2024’s second half. But according to the CME Group FedWatch tool, there was only a 20% chance of a rate cut this July and a 60% chance of a rate cut this September. The Federal Reserve will need to see additional favorable readings on inflation, like the one received on June 28th, before they lower interest rates.

Market breadth has also been narrow as the next graph shows. The strong S&P 500 has been led by those Magnificent Seven* while other market sectors have lagged. Yet part of this dichotomy is how these indices are calculated.

The S&P 500 (SPX) is a market weighted average index where larger companies have a greater impact on how much that index moves up or down. In fact, the Magnificent Seven generated 60% of the S&P 500’s returns in the first half of 2024.

In contrast, each stock in the S&P 500 equally weighted average (SPW) represents 1/500th of that index’s movement. Consequently, the technology sector has a much lower weighting in the SPW index than in the SPX index. This graph depicts that difference with the equally weighted index (SPW) only appreciating by 4.1% in the first half of 2024 versus the 14.5% gains seen for the market weighted index (SPX); quite the gap relative to the last few years.

S&P 500 Market Weighted Average (SPX) vs. S&P 500 Equally Weighted Average (SPW)

(6/30/2020 to 6/28/2024)

Effectively, the stock market’s strong first half performance was driven by the technology and communications sectors. The companies in these two sectors have had strong earnings and are well positioned to continue their growth. But artificial intelligence is increasingly being used by many companies, which is helping to improve their productivity and operating efficiencies.

The U.S. Labor Department tracks total output produced with a given input of labor. And these numbers have been materially higher over the last twelve months than they were in 2022. Such improvements have helped grow corporate earnings. FactSet’s compiled data suggest that corporate earnings will grow by 8.7% in the second quarter, 11% for all of 2024, and by 14% in 2025.

Corporate profit margins have also remained strong with the S&P 500’s net income margin at 12.4% in 2024’s first quarter. Analysts project this margin to increase to 12.7% in the second quarter and then exceed 13% in 2024’s second half.
If, in fact, corporate earnings do remain strong, and/or improve, these advances should help broaden the stock market’s breadth. Strong earnings will support the economy’s growth, which in turn should help other market sectors perform better. Much as the growth in artificial intelligence has expanded the need for electricity and helped the utility sector outperform in 2024’s first half.

But market valuations matter also. Jon Sindreu of The Wall Street Journal looked at valuations by dividing the S&P 500 companies into 50 artificial intelligence related companies and 450 other companies. The stocks for those 50 companies appreciated by 14.7% in the second quarter, while the stocks for the other 450 companies lost 1.2% in this year’s second quarter. Stocks in six of the eleven market sectors–health care, real estate, financials, energy, industrials and materials–all lost money in the second quarter. Accordingly, the stocks for these other 450 companies had a price/earnings ratio of 17.6 at the end of June versus 18.0 at the end of March. These stocks are cheaper now than they were last spring. The P/E for those other 50 stocks was 27.5 at the end of June.

If earnings do continue to grow across market sectors, that will support greater market breadth. Such progress should improve the market’s base and help support further market advances. But market corrections should always be expected, as markets don’t only move in one straight line. Having a mixed and diverse portfolio also helps to reduce risk and unwanted declines. We will continue our efforts to look for stocks where we can find growth at a reasonable price. And as long-term investors, we know that time is on our side.

Do please let us know if you would like to meet or speak with us directly. Enjoy your summer!

* Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla comprise the Magnificent Seven.

Securities noted above valued as of the market close on July 2, 2024:

Alphabet Inc. Cl C (AMZN $186.61)
Amazon.com Inc. (AMZN $200.00)
Apple Inc. (AAPL $220.27)
Meta Platforms Inc. (META $509.50)
Microsoft Corp. (MSFT $459.28)
NVIDIA Corporation (NVDA $122.67)
Tesla Inc. (TSLA $231.26)

Winter beach scene with dog walkers in the distance

April 4 2024

First Quarter 2024 Review and Commentary

abigail@analytive.com Quarterly Review

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April 4, 2024

Robert Bingham, CFA, President and Chief Investment Officer
John Wright, Principal
Jared Soper, Senior Portfolio Manager

“It’s really important not to try to play politics with your portfolio because it rarely works the way you think it will.”
– J.P. Morgan Asset Management’s Meera Pandit on 3/12/24

Back to normal? After COVID-19, office closings, supply shocks, a short recession, a quick economic bounce back, a 23% drop in the stock market, all followed by a 43% stock market rally, is everything fine and back to normal? According to this year’s first quarter returns for the stock market, the answer is Yes. Market breadth also improved noticeably in the first quarter with over half of the stocks in the S&P 500 setting new 52-week highs in the quarter.

The fear and panic that gripped the 2022 markets was replaced by the excitement and euphoria of the recovery, and then by the near certainty that our economy is growing well with a moderate rate of inflation. And while economists’ projections are less than perfect, the first quarter’s economic data supports this expectation that America is again growing steadily without excessive rates of inflation.

On March 29th, the Commerce Department reported that consumer spending increased by 0.8% in February, which was the largest reported gain since January of 2023; or about 5% on an annualized basis. February’s increase also handily beat the 0.2% increase in January 2024. These back-to-back increases suggest a healthy growth rate in 2024’s first quarter Gross Domestic Product since consumer spending accounts for nearly 70% of economic activity in the United States.

This economic growth reflects the ongoing growth in America’s labor force, and the increased level of wages being paid. America’s rate of saving however did also decline to 3.6% in February from the 4.1% level seen in January. So, consumer consumption rates may very well slow in the second quarter.

Importantly, the Commerce Department’s inflation data also released on March 29th read favorably as well. Price increases in February rose less than expected with costs of household furnishings, manufactured goods, equipment, hotels, restaurants, and health care being well contained. Energy costs, housing, utilities, clothing, insurance and financial service costs all did go higher however. Yet overall, the Core Personal Consumption Expenditures Price Index increased 2.8% in February on an annualized basis versus the 2.9% rate seen in January. The Personal Consumption Expenditures Price Index increased on a 12-month basis by 2.5% through February.

Inflation rates, while improved, remain higher than the Federal Reserve would like to see. However, current rates of inflation are 50% lower than what we experienced in 2022. Yet, the scars from those 2022 increases can still be felt.

This data, amongst numerous other economic releases, will be tracked closely over the next few months by the Federal Reserve, market analysts and investors. Such data will determine what happens next to interest rates. Last December, bond investors anticipated that the Federal Reserve would cut interest rates by 25 basis points six times during 2024. Yet last December, the Federal Reserve had only projected three 25 basis point cuts in 2024.

These conflicting expectations coalesced around the Federal Reserve’s three rate scenario as 2024’s first quarter ended. First quarter economic growth also proved more robust than many anticipated as a 1% expected growth rate in GDP for the first quarter has been upgraded to 2% by many economists. Projections are always subject to change of course, but importantly last December’s recessionary concerns have abated materially given this year’s healthy level of consumer spending.

However, these better-than-expected growth trends may reduce the Federal Reserve’s inclination to cut interest rates. In fact, on March 27th, Federal Reserve Governor Christoper Waller stated, “In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to recent data.”

This debate on when and how extensive might be any interest rate cuts will increasingly capture financial headlines. And such debates may reduce investors’ interest in buying stocks in the weeks or months ahead. Certainly, early April’s market sell-off reflected some of these concerns as the federal funds futures markets reduced expectations for a June interest rate cut to 55% from 70% in the middle of March. April and May’s corporate earnings releases will also help shape the markets’ movements.

And as we’ve said before, market corrections are a good thing. Markets never go in a straight line and opinions are never universal. Corrections allow investors to buy good assets on sale and/or at a discount. Traders take profits, and markets do often go sideways. New data and information are always being absorbed.

Interestingly enough, analysis from Bespoke Investment Group suggests that after two back-to-back quarters of 10% gains in the stock market, stocks decline by about 1% in the following month. But in the following two, three, six and twelve month periods, the S&P 500 Index has historically traded higher, or up about 12.3% one year later.

More importantly as the first quarter ended, corporate earnings for the S&P 500 companies were still expected to grow steadily over both 2024 and 2025. And cash flow per share for these companies was expected to grow by double digits in both years. Of course, these expectations will be shaped by first quarter earnings results; but as April began, fundamental trends looked quite good. Corporate fundamentals just may be growing into the stock market’s first quarter price action.

Risks do however remain ahead. Commercial real estate markets remain soft as measured by both the commercial mortgage-backed securities (CMBS) market and the RCA CPPI National All-Property Index. Depending on the type of property and region of the country, some property values have fallen by more than 40% from peak valuations in 2022.

In 2023, $541 billion of commercial real estate debt matured according to Trepp, the data analytics firm. And over $2 trillion of commercial real estate debt is expected to mature in these next three years. So far, borrowers have been able to renegotiate or extend terms. But according to CRED iQ, another real estate data provider, only 26% of 2023’s maturing $35.8 billion office CMBS loans were fully paid off last year. And Fitch Ratings projects that 4.5% of the CMBS loans will become delinquent in 2024, up from 2023’s 2.3% delinquency rate. Fitch also projects this delinquency rate to increase to 4.9% in 2025.

Meanwhile, the private equity community has raised over $240 billion to invest in distressed real estate according to Preqin, the alternative funds data tracking provider. Perhaps this sector’s weakness will be much absorbed by newly-allocated risk capital. Lower interest rates would clearly benefit America’s commercial real estate sector.

But if inflation doesn’t fall further, or energy prices go higher, or the economy grows more strongly, the Federal Reserve may choose to maintain their “higher for longer” interest rate policy. Government debt financing will also help keep interest rates higher. So, time will tell what policy shifts prevail and how markets react.

Do call us with any questions or let us know if you would like to meet any time soon.