Welcome to October and the final quarter of 2024!

As I’ve mentioned in prior posts, Windermere subscribes to research from an independent research firm called Fundstrat. This week, their founder Tom Lee shared his outlook for the remainder of the year. He framed it as a showdown between potential headwinds (ie: things that could slow down or derail markets) and potential tailwinds (ie: things that could support or propel markets higher). I thought it was a very helpful framework and as a result, I’m summarizing it below – as well as giving you my take on which way I think the “wind may blow” from here so to speak!

Potential Headwinds

As is always the case, there are a few items that could work against investors during the home stretch of 2024. At the moment, here are three that top the list:

1.October seasonality – while history never repeats, it certainly tends to rhyme. And when it comes to investment returns in October during a strong up year, the historical patterns are not working in our favor. With the S&P 500 up 21% thru September 30th, this has been the 9th best market year start since 1950 (that’s exciting!). When looking at the top ten starts since 1950 (again, we are in one of them this year), 70% saw declines in October averaging 2% down. So the historical base case is to tread water/fall slightly in October if history is our guide

2. Port strike – just when you thought it was safe to go to the grocery store again post COVID, you may soon encounter hoarding behavior in the coming days! This is a result of a strike by port workers’ unions that is impacting ports on the east and golf coast (the west coast remains operational). Any kink in the supply chain that is prolonged in nature could be damaging to the economy as it may result in too many dollars chasing too few goods – the recipe for inflationary pressures. Currently, it is not anticipated that this strike will last for a long period of time, but that certainly remains to be seen

3. Global unrest – Iran’s attack this week of Israel further destabilizes an already volatile region. While the impact on US companies and markets may not be immediately felt, any uncertainty and unrest typically does not lead to market strength. We have no insights into how this will play out and the path of this conflict remains unpredictable

Potential Tailwinds

There are also a few forces at work that could possibly benefit markets for the remainder of the year, including:

1.Federal Reserve achieving “no landing” – After last month’s rate announcement and subsequent commentary, it is becoming increasingly possible that the Federal Reserve will achieve a “no landing” scenario – which means they have succeeded in bringing down inflation while maintaining labor strength and avoiding a recession. Things can still change but as of now, this seems to be an outcome with a relatively high probability. This is likely to lead to further rate cuts (as has been signaled, largely to help the labor market part of their dual mandate), which are supportive of market returns both in equities and fixed income

2. Chinese stimulus – As we discussed last week’s, China’s government took significant actions to boost their economy (and their stock market). As of now, it has worked with Chinese equities posting 20% returns in a week. Time will tell if the effects have staying power but a boost to the world’s second largest economy will have positive carryover effects if they do. And with the Chinese market still considerably behind the US market (lags by 77% in the pat 10 years even after this record bounce), there is certainly room for more upside if these new measures gain traction

3.Election will soon be over – We are just over 30 days away from the US elections. Regardless of the outcome, by early November, we will know the outcome (hopefully…) This will bring certainty to markets and investors. Once the questions turn into answers, investors will likely be confident rebalancing and deploying the trillions of cash that remains “on hold” until post election (as of last week, there was $6.4 trillion in money market funds)

Our Take

If we had to pick a direction for the “wind to blow” between now and year end, we would lean slightly to the tailwind arguments. Why? Primarily due to the fact that two of the three headwinds are (hopefully) temporary. And the other is not that significant of a historical decline (and could very well be proven wrong). There are of course other potential headwinds to consider, such as an election surprise (with all branches going to one party which would remove the markets preferred “gridlock” dynamic) or weak quarterly earnings, but we do not assign high probabilities to those items either.

On the other hand, the tailwinds appear to have a decent probability of holding true to course. If we get rates falling, some positive momentum in the world’s second largest economy, and investment of just some of the cash on the sidelines, it should be a decent finish for 2024.

As always, the future is unknowable and we will just see which way the wind blows in the coming months. The September payroll report (due out right around the time this publishes) will be yet another indicator to consider. More on that next week!

Onward we go,