***Q3 Client Update***

A quick update on our presidential election model which has had a strong track record over the years. The model was last wrong in 1992. It has been dusted off and I am running every other day this week. Then I will run it every day into Tuesday. Kamala Harris scores the point for the economy. That’s unlikely to change with the few pieces of data coming out over the coming few days. The stock market times series is not as clear cut right now. I am scheduling some media segments between Friday and Tuesday to share the latest.

I am not interested in arguing or debating politics regarding the model. It is not based on opinions nor feelings nor even policy. It strictly looks at recent economic data as well as three times series of stock market data to forecast which party will win the White House. You can agree. You can disagree. The model will be right or wrong.

The third quarter of 2024 was quieter than I anticipated. Markets were generally sanguine, and volatility did not trend higher except for that one mini-crash day on August 5th when the Japanese Yen spiked, causing asset dislocations around the globe. More on that later.

Politics dominated the landscape in Q3. The Republicans held their convention in Milwaukee with party nominee Donald Trump curiously choosing Ohio Senator, JD Vance, as his running mate. Whispers were that Don Jr. made the decision. In an election that will likely come down to 10 counties in five states many thought a running mate closer to the center would yield more votes. The Democrats had their own woes as well, following a very challenging debate by President Biden which led to his eventual demise as the incumbent nominee and selection of Vice President Harris to replace him.

If I told you that a sitting president who was running for re-election was essentially removed from the ticket along with two separate assassination attempts on the opponent as well as a widening war in the Middle East, how do you think the stock market would react? I can’t imagine anyone would say that it was non plussed. But that is exactly what happened. Markets yawned and continued on their way. And following a poor debate showing by Donald Trump, do you know how the stock market reacted? It didn’t. It yawned again and continued on its merry way.

Aside from politics which obviously and rightfully dominated the quarter, the summer Olympics took place in France. In years past, the Olympics used to offer some short-term investment opportunities in certain apparel manufacturers. Those days are long gone. While I personally love the Olympics and watch as much as I can, I sensed a lack of excitement in our friend circle, the community and throughout social media.

Turning to the economic and market events of Q3, the secondary indices fared better than the majors. The bull market broadened which was good news for the mid and small cap indices like the S&P 400 and Russell 2000. The NASDAQ 100 had a small gain. When I randomly look at the more popular companies, I see a common theme that many stocks and sectors really haven’t gone anywhere since June. That’s not necessarily a bad thing. Rather, the rotation allows certain stocks and groups to rest and digest while others move on to leadership roles. In other words, which is very typical and positive bull market behavior.

The quarter was not without incident, however. For the first five weeks of Q3 the Japanese Yen melted higher in very unusual fashion. I have long written about the “yen/carry” trade where investors have borrowed trillions of dollars in the Yen, converted it to dollars and invested in our markets because the Bank of Japan had the most accommodative stance on earth. The trade worked for decades, and no one really knows exactly how much was really invested. It has always been on my list of things that keep me up at night because I wondered what would happen when the trade started to unwind.

After almost two decades the Bank of Japan raised interest rates in March and again in July as the economy finally, finally, finally saw inflation. But it wasn’t until early July that the Yen skyrocketed, forcing many in the “yen/carry” trade to supposedly unwind. I say “supposedly” because after the Yen pulled back, it went even higher into early September without even a market hiccup.

Many people recall that global stocks saw a mini-crash on August 5th, culminating an almost 9% pullback for the S&P 500 that was blamed solely on the Yen soaring. However, people forget that U.S. stocks were down sharply the prior two days as well, due to growing concerns about an economic slowdown. On the blog, I offered commentary on whether markets saw an earthquake or rogue wave. I gave examples of both. The former would lead to a number of aftershocks which was my premise while the latter would lead to an immediate bottom and rally. It turned out to be the latter.

The Labor Department did their annual revision of job growth in Q3, leading to a million vanishing from the reports. The conspiracy theorists were out in full force. I wrote about this on the blog. I do not believe for a nanosecond that the government could or would manipulate employment data for political gain. Their systems are so antiquated that economic reports are constantly revised and revised again when the real, hard data come in. There is something called the “birth/death” model for companies that the Labor Department uses to estimate job growth. It has become even more unreliable, especially at major turning points in the economy.

Internationally and super importantly, the Chinese economy has been in the toilet since COVID began. Their policies have been all over the place. They want western money. They expel western money. They punish their own capitalists. They want to juice their markets. On September 24th, the People’s Bank of China threw down the gauntlet and announced a massive and epic stimulus package that I would definitely label, shock and awe. Short on details, it did a number of things not limited to propelling their stock market to two week gains normally seen in several quarters to a year. The Chinese also forced international shorts, those positioned for lower markets, to panic and scramble to buy, buy, buy at a rapid pace that fed on itself day in and day out.

Not to be outdone, our own Federal Reserve’s Open Market Committee, which is the voting members of the Fed, began an interest rate cutting cycle of their own on September 18th, the first such move since March 2020. Jay Powell & Company reduced the Fed Funds Rate by 0.50%, which was double the cut I thought was appropriate. I think they have and will regret that decision as inflation is not extinguished nor is growth weak enough to warrant the magnitude. I have been critical of the Fed my whole career. How can the supposed smartest bankers on earth continually make poor decisions? They waited way too long to hike rates but cut them at a moment’s notice. With more than $7 trillion on their balance sheet, they decided to reduce the amount of tapering. They should forge ahead with the plan and at least reduce the balance sheet to where it was before COVID which was roughly $4 trillion.

Many of you know that we have a robust model that forecasts presidential elections with almost 90% accuracy. It is 100% data driven based on stock market returns over three time periods leading up to the election as well as a few economic indicators. Political opinion is irrelevant. This model correctly predicted Biden’s, Trump’s, Obama’s and Bush’s victories. I look forward to sharing more as the election approaches.

At this point in the report, I usually write about my barbell strategy for investing. If you picture a barbell from the gym, there is a long, thin bar with big weights on both ends. Think of those weights as our conservative strategies and aggressive ones, the exact proportions do not matter yet. In theory, your money would have higher weights to conservative and aggressive strategies, especially if you are in or very close to retirement, and lower allocations to the middle of the road strategies.

This barbell approach has also worked very well with monies being transferred in from 401K and 403b plans as those pre-packaged plans rely heavily on bonds for the more conservative approach and do not account for interest rates rising. Additionally, their aggressive choices do not usually reward the risk taken. If you would like to learn more about the barbell approach, we can set up a meeting, call, Skype or Zoom.

Q4 is here and the election will finally be over. I don’t know anyone who isn’t excited to end what has been in our faces for far too long. The ads, the emails, the texts, the social media will hopefully all ceases. Reportedly, both parties have already lined up lawsuits to contest the election. I just hope and pray that the country remains peaceful, and it doesn’t take as long as 2000 to determine the outcome.

On the investing side, I cannot tell you how many people I have communicated with this year who were so adamantly against investing for fear of the election. “Trump is going to wreck the economy”, some told me. “Harris is going to crash the markets”, I have heard. Data don’t lie and I can tell you, as folks who are invested, that this is one of the worst decisions I see in my 35-year career.

Markets hate uncertainty. Whether you like it or not, one of two people will become our next president. Markets have had and will have time to adjust and adapt to the two potential outcomes. As November 5th approaches, the markets will have priced in much of the outcome. Please notice that I said “much” and not “all”. There will be a market reaction, but I do not believe it will be significant. The stock market is on firm footing and Q4 should be an up quarter, roughly 5% if you just base it on history. Cryptocurrencies and gold should follow stocks. The bond market is a different story as the odds favor an uptick in inflation as well as better economic data.

The bull market turns two during the third week of October. What was once completed hated and disavowed has become celebrated, accepted and adored. While that does increase risk, it doesn’t mean it has to end. In fact, it should live on well into 2025 as the DNA markers for a bear market have not started popping up.

With the economy stronger than most forecast and continuing to surprise to the upside, the Fed has a problem in that they cut too much out of the gate and led the markets to expect more of the same in Q4. I think the Fed cuts 0.25% in Q4. The U.S. dollar should bounce smartly as the U.S. will no longer be the most accommodative central bank.

Economically, look for the economy to produce solid growth. The unemployment rate remains above my 4% line in the sand, but weekly jobless claims won’t exceed my 4-week average line in the sand of 250,000. Q4 looks to be sanguine for the markets and economy.

Please continue to share your feedback, positive and negative. Investing is a marathon not a sprint and the long-term future continues to look very, very bright. We look forward to sharing that with you over the coming years. And I am always interested in meeting, whether it is to create or update retirement projections on your financial situation, review the strategies in your portfolio, run social security analysis’ on when and how to file for the best benefit, discuss your estate or even smaller transactional-type issues like securing a mortgage or weighing insurance. Again, here is the link to my calendar to schedule a meeting in the office, call, Zoom meeting or Skype. https://schedulewithpaul.as.me/

Thank you for the privilege of serving as your investment adviser!

Sincerely,

Heritage Capital, LLC

Paul Schatz AIF

President

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On Monday we bought OIH, RYVIX, DXHYX and more SPYB. On Tuesday we bought PCY, EMB and IJS. We sold DXHYX, QLD and some levered NDX.