Third Quarter Newsletter

Responsible Guidance:  Third Quarter 2024 Newsletter, October 2024

It Finally Happened

For the first time since March 2020 (Covid), the Federal Reserve (Fed) cut interest rates in its September 2024 meeting.  A combination of lower inflation readings and a softening job market helped fuel the Fed’s decision to lower the fed funds target rate by 50 basis points (a basis point represents 1/100 of 1%) to a target range of 4.75% to 5%.

Markets responded positively, as every index we cover in our newsletter generated positive returns in the third quarter.  Those more sensitive to interest rates, like real estate, responded the most positively.  You may remember reading the last line from this section in our second quarter’s newsletter.  As a reminder, it was: “Think about where performances may go from here.  It is good to have a plan for the downside, but remember the upside is also possible.”  Though the third quarter ended up strong, our line was not meant to be a forecast.  We have no way of regularly predicting investment performance.  We could easily reverse the statement now and say something like, though you may have benefited from solid investment performance in the third quarter, it’s important to also plan for market corrections.  Again, this is not a forecast.  It is a recommendation to have plans in place for changing market environments.

As you read through the positive data for the quarter, we want you to feel confident in our strategies for you.  As your fiduciary advisor, we know we cannot control market performance, but we can control our investment approach, which is based on applying diversification, and remaining disciplined to strategies.  We rebalance portfolios when needed.  And we use asset location and tax-loss-trading strategies to include tax planning as part of the investment strategy.  Finally, it’s not just about investments, but it’s also about anything that could impact your financial life, which you know we refer to as Your Personal Economy^SM .

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification. Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries. There are popular benchmark indexes that provide perspectives about the performance of global investments.

For equities, we monitor the MSCI ACWI All Cap Index. This index represents stock investments across 23 developed and 24 emerging markets. The index was up 6.85% in the third quarter, improving year-to-date (YTD) performance to 17.75%.  Concerns about inflation and interest rates have weakened, creating opportunities for stocks to advance.  Geopolitical risks remain but were not enough to deter performance. The global equity-based index has now been positive for four consecutive quarters.

For fixed income, or bonds, we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies. The index was up 6.95% in the third quarter, helping YTD performance into positive territory, up 2.72%.  Finally, decreasing concerns about inflation and interest rates impacted global bonds, as measured by this index.

U.S. Economy

The economy remains on solid footing, continuing to grow, as the Federal Reserve has started its interest rate easing (lowering rates).  The employment situation remains a little bit of a concern, as the unemployment rate remains above 4%.

The Bureau of Economic Analysis (BEA) announced in its revised estimate for the second quarter of 2024 that real Gross Domestic Product (GDP) increased at an annual rate of 3.0%.  This is a rebound from the 1.6% reported in the first quarter.  The increase was driven by increases in consumer spending, private inventory investment, and nonresidential fixed investments (the full press release can be found at  https://www.bea.gov). This was the eighth quarter in a row of positive economic growth.

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the second quarter of 2024) using an approach like the BEA. On October 17, 2024, the estimate for third quarter GDP from the Federal Reserve Bank of Atlanta was positive 3.4%. Note that this estimate updates regularly and is subject to change. The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow.

Job growth continues, but the unemployment rate remains above where it started the year. According to the Bureau of Labor Statistics (BLS), the U.S. gained 254,000 jobs for the month of September, and the unemployment remained above 4%, at 4.1%  BLS indicated job growth was notable in food services and drinking places, healthcare, government, social assistance, and construction (full press release can be found at: https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, continued to perform positively, up 5.89% in the third quarter, with YTD performance up to 22.08%.  Following last year’s strong performance, it continues as the best performing index of those covered in our newsletter this year. Utilities, Communication Services, and Technology were some of the top performing sectors in the index so far this year.

For technical analysts and trend followers, the index dipped below the 50-day moving average in late July and early September but finished above the trend line for the quarter.  The index remained above the 200-day moving average for the entire quarter.  

Dividing index components into growth and value, growth-focused stocks continue to outperform YTD 2024.  However, value stocks were stronger in the third quarter of the year. Value last outperformed on a calendar year basis in 2022, when most equity indexes were struggling.

International Stocks

International-developed-country stocks (such as those in the European Union), measured by the MSCI EAFE index, were up 7.26% in the third quarter, rebounding from slightly negative performance in the second quarter.  YTD performance is up 12.99%. Non-developed, or emerging-country stocks, measured by the MSCI EM index, were up 8.72% in the third quarter, helping improve YTD performance to 16.86%.

Though international stocks had a solid quarter, both emerging-market and international-developed stocks outside the U.S. continue to lag the S&P 500 YTD.  The last time international stocks outperformed U.S stocks on a calendar year basis was 2022, and then 2017 prior to that.

Bonds

U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, was up 5.20% in the third quarter as bond investors reacted to the Federal Reserve interest rate cut (when interest rates move lower bond, prices go up, usually resulting in gains for existing bond holders).  YTD the index is now up 5.26%.  The index gauges the performance of investment-grade intermediate bonds.

The 10-year U.S. Treasury bond yield finished the third quarter at 3.81%, very close to where it began the year at 3.88%.  Rates dropped significantly in the third quarter with the Fed rate cut.   

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion, and fixed-income investors are compensated for taking longer-term risks. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty, and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

At the end of 2024’s third quarter, the 2-year rate was 3.66% (and 10-year 3.81% per above) finally moving the curve from inverted to slightly positive, or basically flat at positive 15 basis points (a basis point represents 1/100 of 1%). As a point of reference, the yield curve has been inverted since the third quarter of 2022, just after the Fed started raising rates in March of 2022 to fight inflation.

The yield curve steepened slightly in the third quarter after having a similar movement in the first and second quarters.  If the economy continues to grow and if inflation continues to slow, the slight steepening in recent quarters may indicate investors are thinking about a growing economy with long-term rates possibly remaining higher than short-term rates.

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, was the best performing index of those we cover, up 16.79% in the third quarter.  This was a major turnaround from the negative performance in the second quarter.  Through the first nine months, the index is now up 14.23%.  As we have said many times, performance does rotate, and it is difficult to predict. 

According to Freddie Mac (FM), the average 30-year residential home mortgage rate decreased to 6.44% (as of 10/17/2024). During the past 52 weeks, the rate has been between 6.08% and 7.79%.

Natural Resources

The Bloomberg Commodity Index was relatively flat in the third quarter, up less than 1%.  YTD the index is up by over 5% as the costs of commodities and raw materials increased. Precious metals, such as gold, and other items like cattle, and copper have been strong this year.  Distractors from positive performance include natural gas, soybeans, and corn.    

Baron Client Strategies

Planning for multiple outcomes with Your Personal Economy^SM is critical to helping our clients answer the simple question "Am I going to be OK?".

As clients know, we are Registered Investment Advisors (fiduciaries) and we operate as fee-only advisors, so we do not receive a commission for making investment transactions. A big reason your Baron team makes trades is to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy. Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions. We use this same approach with our own personal money.

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy. Validate the investment choices versus peer investments. Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have experienced any changes to your financial position or are considering changing financial goals and objectives, please let us know.

Your Personal Economy^SM

Concluding Comments

As investors evaluate the new opportunities and challenges resulting from the Fed shifting into an interest-rate-easing cycle, you may be also evaluating all things that impact you with a dollar sign involved.  Remember we are here for you and happy to offer direct advice or work with your other professionals to provide you with the options that can help work toward financial success.

Baron Updates  

Our thoughts are with those affected by the recent hurricanes and tornadoes in the South.  We hope you and your loved ones are safe! If you are experiencing any financial planning difficulties,  please reach out to your Baron Team for guidance.  As always, we continue our support for the All Faiths Food Bank in Sarasota, but particularly now with our contributions to their Hurricane Helene and Hurricane Milton relief funds, as well as to the American Red Cross Hurricane Milton relief fund.

For our clients and friends, we hope you enjoyed our recent Client Appreciation Event in New Jersey.  It is always a pleasure to see you!  We were happy to introduce you to some of the dedicated people who help run the favorite charities we are honored to support – the Fair Lawn Food Pantry, Adopt-a-Soldier Platoon, and Spectrum for Living.  You can learn more about these organizations on our website.

We look forward to hosting a Client Appreciation Spring Training Baseball game event in Sarasota, Florida on March 20, 2025 – please save the date.

October is a noteworthy month. In addition to the start of Medicare’s Annual Open Enrollment, (October 15th – December 7th), it is also Cybersecurity Awareness Month and Financial Planning Month, two areas that we focus on. Continue to look for educational and Baron-related posts on our website blog, including guidance for taking inherited IRA withdrawals and qualified charitable distributions. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing.

Remember that you can also visit our website to gain access to your client portal. Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

We hope you have a healthy and happy holiday season!

Warmest Regards,

 Baron Financial Group, LLC
www.baron-financial.com

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 17, 2024 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.