Client Q&A
Fourth Quarter 2024
“They’re just the same thing over and over. We can’t help ourselves! And you and I can’t control it, stop it, slow it, or even ever so slightly alter it…” – Jeremy Irons in Margin Call, giving a private speech on economic booms and busts
As we approach the end of 2024, stocks and bonds look to put the finishing touches on what may turn out to be a positive year for financial markets overall. Equity markets have been buoyed by continued earnings expansion as well as significant price appreciation in several of the mega cap technology names. At the same time, the Federal Reserve’s recent rate cut seems to have marked a definitive end to higher rates for this current economic cycle and lifted bond prices as we end the year.
Given this backdrop, we thought it would be helpful to share our answers to several questions we have frequently received from clients in 2024.
The Fed
The Federal Reserve is lowering interest rates. Why are they doing this and how will this affect my stocks and bonds?
The Fed is lowering rates to align them with more modest economic growth now that stimulus from the COVID-19 era has worn off. Rates in 2023 and 2024 were kept unusually high to combat the hottest inflation readings in 40 years, but those readings have finally fallen closer to the Fed’s long-term target of 2%.
Lower rates typically aid stock prices for numerous reasons: they lower borrowing costs, increase stock price valuations, and encourage more money to flow into stocks as bonds typically yield less. Bond prices also tend to rise as rates decline, another sign that yields in this segment of the market will be lower going forward.
Those lower interest rates may also have an effect on commodity prices. Leading us to….
Gold
Should I buy gold to protect myself from further inflation or a deteriorating currency?
At Mitchell Sinkler & Starr, we typically do not make or recommend allocations to commodities like gold. This is primarily because at the end of the day, gold is simply another precious metal. It produces no income, it does not grow, and its price is largely at the whim of supply and demand in the commodities markets. Given historic trends, we would also not expect gold to outperform stocks over the long term.
This chart reflects the most favorable historical starting point to invest in gold (right before the ‘Nixon shock’). Even then, gold could not keep pace with stocks over the long term.
The main benefit some clients might derive from gold is the potential peace of mind it provides. Knowing that they have a portion of their assets invested in a time-tested store of wealth may help them sleep better at night, even though the asset itself does not produce any income.
The yearning for peace of mind clients feel may be due to the obnoxious, non-stop political commercials seen and heard on TV and radio. Which brings us to…
The Presidential Election
What effect will the presidential election have on my portfolio?
First and foremost, the economic cycle doesn’t particularly care who the president is. The economy expands and contracts in cycles, and has for hundreds of years. People like to assign certain expansions and contractions to presidential administrations, typically when it points to a favorable outcome for their political side. However, the reality is not quite as exciting.
It is true that some segments of the market are affected by legislation. Tariffs on overseas goods will affect the cost of imports and domestic manufacturing. Legislation in the healthcare arena may crimp profits for companies in the sector. At the end of the day, what is certain is that there will be another broad-based expansion and subsequent recession. It’s just the timing that’s less clear.
Our quote above from the film Margin Call is a pointed reminder that no one person (or presidential administration) can change the economic cycle to their whim.
In Conclusion
At Mitchell Sinkler & Starr, our focus remains on our clients’ needs and on how to achieve their goals by investing across financial markets. To do this, we consistently maintain a clear picture of both the macro economic climate (broad-based economic factors, interest rates, inflation, etc.) and the micro climate (company earnings). This enables us to answer questions such as those above in a clear and timely manner.
– Mitchell Sinkler & Starr’s Portfolio Managers
Economic and Capital Markets Data
