Tim Hoyle, Chief Investment Officer
thoyle@haverfordquality.com

Don’t Let Politics Get in the Way of Investing

Number 7 of renowned investor Marty Zweig’s Trading Rules states, “Every indicator eventually bites the dust.” Since first compiling and publishing his rules in 1990, he could not have been more right in 2024.

Despite the fastest and most aggressive rate hiking cycle in modern history, leading to an inverted yield curve for 24 consecutive months, the economic expansion endures. The economy continues to grow even as Leading Economic Indicators have declined for 26 straight months and ISM Manufacturing surveys have been in contraction territory for 27 out of the past 28 months.

A strong labor market, consumer spending, government stimulus, and corporate profits have been driving both the economy and the markets, despite the negative outlook suggested by various economic indicators. We anticipate these positive factors will remain in place well into 2025 as the Federal Open Market Committee continues to gradually cut rates.

We do not foresee an additional 50 basis point cut in the near future. September’s 50-basis-point cut was an acknowledgment that the FOMC should have cut rates in July, given the inflation data and revisions to the jobs data. It is unusual to see the Fed beginning to cut rates even as corporate profits are accelerating. This is yet another example of how the economic cycle has been disrupted by the global pandemic.

Stock market performance broadened out in the third quarter. The average S&P 500 stock advanced 9% last quarter, while the cap-weighted index rose 5%. The broader the market’s advance, the more optimistic we are about its sustainability. As a result of this year’s strong performance, the market valuation is above 23x this year’s earnings and 21x next year’s. The market is certainly not undervalued. However, valuation is a poor indicator of the market’s near-term direction.

With the Presidential election less than 40 days away, expect the rhetoric to intensify and market volatility to increase. The next President is likely to face even higher tensions in the Middle East, increased calls for a negotiated truce between Russia and Ukraine, and the need to navigate an automatic reset in the tax code back to 2017 levels. Brace yourself and remember one of Haverford’s Investing Rules to Remember: don’t let politics get in the way of investing.