A New Economic Horizon

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” – William Arthur Ward

The winds of monetary policy are blowing in new directions.  After years of battling inflation, central banks around the world are finally easing the pressure.  This quarter marks a pivotal moment, and while change can be unsettling, it also brings opportunity.  We take a closer look at how these shifts might shape the financial landscape and what it means for your investments. 

The Fed’s Pivot: Easing the Pressure

After an aggressive two-year campaign to tame inflation, the Federal Reserve made a key move in September, cutting interest rates by 0.5%.  This is the first rate reduction since the early days of the pandemic in 2020.  Fed Chair Jerome Powell emphasized that while progress is being made, there’s still work to be done: “We’re not yet declaring victory, but we are encouraged by the progress on inflation.”  Additional rate cuts are expected before the end of the year.    

For many, this shift suggests we may have turned a corner in the fight against inflation, and that’s something worth noting.  Lower interest rates generally boost borrowing and spending, which can help stimulate economic growth.  

Central Banks Align Across the Globe

It’s not just the Fed taking action.  Central banks around the world are aligning their strategies.  The Bank of Canada was the first to break ranks, cutting its benchmark interest rate in three consecutive meetings starting in June.  The European Central Bank, overseeing the 20 countries that use the euro, followed suit, cutting rates by 0.25% in both June and September.  Even the Bank of England joined in with its first cut in four years.  You get the picture.    

Perhaps the most striking development came from the East.  After shocking the markets with a rare rate hike earlier in the quarter, the Bank of Japan quickly softened its hawkish stance, acknowledging the potential risks of too much market volatility.  Meanwhile, China has launched its most aggressive stimulus since the pandemic, aiming to breathe life into its ailing economy.  Whether China’s measures are enough to overcome years of internal challenges remains to be seen. 

Slowing Down, But Not Stalling

Back home, the U.S. economy shows signs of slowing, but that doesn’t necessarily spell doom.  Job growth is cooling off from its post-pandemic highs, and sectors like manufacturing are feeling the pinch.  Consumer spending remains strong but is starting to taper.   

It’s important to note, however, that a slowdown isn’t the same as a recession.  Fundamentals like low unemployment and wage growth outpacing inflation are still in place.  The service sector, which accounts for a large chunk of the U.S. economy, continues to expand.  So, while the pace of growth might be easing, it doesn’t appear that a recession is looming just yet. 

Inflation: Slow Progress, But Victory in Sight Inflation is finally trending down, though it has been a long battle.  In the U.S., the Consumer Price Index (CPI) rose by 2.5% year-over-year in August – a significant improvement from the 9% peak in mid-2022.  The Fed’s actions have undoubtedly played a role, but so has the stabilization of supply chains.  Shipping rates have fallen, and businesses have made strides in replenishing inventories, meaning those once-frequent empty shelves are becoming less common.

Source:  BLS, FactSet, J.P. Morgan Asset Management

Still, it’s not all good news.  Prices for essentials like food and shelter remain stubbornly high, putting a strain on many Americans, especially those with lower incomes.  For these households, inflation isn’t just a number – it’s a daily struggle. 

Equity Markets: A Broadening Rally and Finding New Opportunities

With interest rates now on a decline, equity markets have found new energy.  While the first half of 2024 was unmistakably dominated by the buzz around artificial intelligence (AI), the third quarter saw other sectors picking up steam.  Industrials, materials and consumer discretionary stocks have started to rally, which is a welcome sign.  A broad-based rally is healthier for the market than one driven by a narrow group of companies. 

Lower interest rates have also been a boon to interest-sensitive sectors like real estate and utilities.  These sectors, often seen as bond proxies due to their stable dividends, are becoming more attractive to investors as borrowing costs decline. 

From a 10,000-foot view, we believe that a backdrop of global central banks cutting rates amidst a still-strong economy, alongside lower borrowing costs, disinflation, and healthy corporate performance are strong macro forces that should provide solid support to stocks.  However, with valuations high and sentiments trending lofty, we are maintaining a healthy degree of caution. 

In our flagship Ascent Dividend Focus strategy, Oracle continues to shine, bolstered by its smart expansion into cloud computing and AI.  We’ve also added to our holdings in Arthur J. Gallagher, MSCI Inc., and the TJX Companies.  We believe these companies, with their strong market positions, are set up for long-term success. 

In our Ascent Global Growth strategy, we took advantage of a tech sector pullback in the quarter to add ARM Holdings and increased our positions in Nvidia and AAON Inc.  Meanwhile, we’ve exited Nike after a brief post-new-CEO rally, as the company faces longer-term challenges that we believe will take time to resolve. 

Over at our Ascent Income Portfolio, we directed our capital to interest-rate sensitive names in the real estate and utilities space, specifically Dominion Energy, which supplies power to Northern Virginia – the largest concentration of data centers in the world – and Ventas Realty, which owns an extensive healthcare property portfolio that stands to benefit from aging demographics.   

Bond Markets: Signs of Life As interest rates peak and start to ease, bond investments are showing signs of life.  The yield on the U.S. 10-year Treasury, which touched 4.4% earlier in the quarter, settled closer to 3.8% by the end of September.  This decline in yields has boosted the value of existing bonds (bond prices move inversely to yields). 

Source: BLS, FactSet, Federal Reserve, J.P. Morgan Asset Management

After roughly a decade of keeping bond durations short when interest rates were low, we have been systematically lengthening the duration of clients’ bond portfolios where it makes sense.  By investing in longer-dated securities, we are able to lock in higher rates for an extended period. 

Looking Ahead: Navigating the Winds of Change

As we look toward the end of the year and the upcoming Presidential election, we anticipate the possibility of some short-term market volatility.  Elections tend to bring a little uncertainty.  However, history shows that election-related market disruptions are typically short-lived. 

At Ascent, we stay politically neutral and focus on what matters most – helping our clients achieve long-term investment success.  Our goal is to guide you through these changing winds with confidence and clear direction. 

As we reflect on the past quarter, we are also mindful of the devasting impact recent hurricanes have had on many communities, including some where our clients reside.  Please know that our team is here to support you in any way we can during this challenging time.  If you need assistance or have any concerns about how these events may affect your financial plans, do not hesitate to reach out to us. 

Thank you for your continued trust and partnership.