Tailwinds or Headwinds? Welcome to Spin Season!

By Deron T. McCoy, CFA®, CFP®, CAIA®
Chief Investment Officer

Don’t you just love this time of year? The fourth quarter brings not only autumn colors and pumpkin-spiced everything, but also football and the World Series. For investors, it’s historically been a particularly bullish time of year. This year, however, the turn of the calendar not only reminds us that the holiday season is approaching but that election season is also around the corner. No doubt the next twelve months will be filled with plenty of political analysis but also some political spin, which precedes some fact-checking as well. Hopefully, this can also serve as a helpful reminder to apply the same sort of filter to your investment analysis.


Just as ‘red’ and ‘blue’ politicians have their talking points, so too do media pundits, Wall Street insiders, and even your friends and family—whether they be ‘bulls’ or ‘bears.’ After all, these days both sides have access to a litany of legitimate data points they believe confirm their stance. Perhaps the Wall Street Journal said it best in their quarterly wrap up stating “the joy of writing about markets is the struggle to piece together a puzzle with moving parts. Often, they fit neatly together. Right now, not so much.”

With help from Bespoke Investment Group, we’ve sifted through this seemingly endless sea of data across an array of economic areas to outline the pros and cons that best make the case for both bulls and bears. Consider the following:

U.S. Stocks The S&P 500® has gained 12% year-to-date and is up 21% over the last twelve months. When we stated “Is this really a great time to buy stocks? The historical data suggests so…,” we outlined why the 2022 carnage was now changing in favor of the investor.
Fast forward to today, after entering a bull-market in Q2, investors should be reminded that “bull markets average a gain of 114% and a duration of 1011 calendar days. If that were to hold true, then we would rise another 70% up to July 2025.”
For the latest quarter, the S&P 500 lost 3.3% while an equally weighted version of the index dropped 4.90%. Gains were hard to come by, with 9 of 11 sectors losing ground in Q3 (declining an average of 5.4%). Small Caps trailed; losing 5.1% in the quarter.
Year-to-date, while the cap-weighted S&P 500 still shows a gain, the same can’t be said for the average stock. According to Bespoke, “the median S&P 500 stock is up just 0.4% YTD, while the median stock in the small-cap Russell 2,000 is actually solidly in the red at -6.6%.” This is hardly indicative of a healthy bull market.
Economic Data After two years of declines, regional manufacturing surveys have started to turn higher and “the downside momentum has abated. In fact, August was the first month where every indicator in the sector showed positive momentum since March 2021.” We can measure and map each individual economic data point and then aggregate them into an index. These Leading Economic Indicators “have fallen for 17 consecutive months. Only two other periods have seen longer streaks of declines: the mid-1970s recession and the global financial crisis. In other words, if we don’t see a recession following this run of data, it will be an unprecedented result.”
Inflation & Interest Rates Broader measures of inflation are still trending down, “with Core CPI near 2% on an annualized basis over the last three months.”  Lower inflation suggests that we are near the end of this rate hike cycle which should act as a tailwind boosting risk assets in the year ahead. Don’t forget the yield curve. “Historically, the average number of days between when the yield curve first inverts to the start of a recession is 589 days. Also, from the time the yield curve bottoms to the start of a recession, the average is 395 days. Based on these two figures, a recession in the second half of 2024 would fit right within the averages.”
Jobs The job market has remained strong with steady growth. Also, Initial Jobless Claims have dropped sharply from their spring spike, which suggests a recession doesn’t appear to be a near-term risk. Job losses are still to come as “leading indicators of bank credit suggest a sharp slowdown in the growth of bank lending to come over the next year (due in part to the bank issues earlier this year). Declining credit outstanding would only do bad things for the economic backdrop.”
Consumer Consumption makes up around 70% of our economy. However, consumers still have a lot of cash on their balance sheets, and most are fairly immune from rising mortgage costs—as many homeowners locked-in historically low mortgage rates over the past decade. Combining the surge in home prices post-covid with the surge in mortgage rates, it’s no wonder home affordability is at its worst levels in 40 years. Together, these factors should crimp economic growth at the margin.
Furthermore, the restart of student loan repayments (after a hiatus during the pandemic) alongside higher energy costs will further hamper spending power and economic growth.
Fiscal Policy In response to recent federal policies (i.e., the Bipartisan Infrastructure Law, the CHIPS Act, and the Inflation Reduction Act), manufacturing construction and “infrastructure spending has accelerated sharply and shows no signs of slowing down. All this raises the floor for GDP growth.” Increased spending is leading to larger deficits at a time when our economy is growing and running at full employment. That’s not normal. And a larger aggregate debt combined with now higher interest costs are further crimping the annual deficit. A period of austerity (lower spending, higher taxes) may be necessary in the not-too-distant future.
Seasonality Historically, the fourth quarter has been the best 3-month period of the year for stock gains. We are now past the third year of the presidential cycle, which has historically marked the best period for stocks.
Landscape While artificial intelligence isn’t new, we appear to be at an inflection point which could propel productivity and corporate earnings for much of the next cycle. “Every week there seems to be some new tech in the AI space introduced, and search interest for AI topics remains elevated and trending higher.” The most recent podcast with the latest Mark Zuckerberg avatar highlights how fast this technology is evolving. The last cycle was dominated by low interest rates and Quantitative Easing. As such, the investment landscape was dismal for anything other than stocks. Now, “the S&P 500’s earnings yield relative to Treasury yields and real rates is at its lowest levels in decades—meaning stocks are less attractive relative to risk-free rates. The S&P 500’s dividend yield was more than 100 basis points higher than the 2-year Treasury yield two years ago, but it’s now 340 basis points lower. There is clearly an alternative to stocks again.”

Take a moment to just consider the potential evolving narrative that has stocks moving higher as the result of a resiliently strong economy, in part due to fiscal policy supporting manufacturing amid a ‘reshoring’ boomlet—all brought about by higher government spending. But then, imagine this increased government spending driving up government borrowing needs which in turn lifts interest rates higher—all of which are then blamed for a stock selloff.

These layers and levels of spin quickly become mind-numbing and are causing an incredible amount of undue angst for investors worldwide.

What’s the takeaway? Don’t listen to the spin. While there’s certainly some degree of merit to each of the pros and cons listed above, the answer to it all probably lies somewhere in the middle (psst… don’t tell that to the politicians!). Fortunately for investors, a great deal of money can be made in the ‘middle.’ Unlike the last cycle, in today’s investment landscape, investors can own a variety of assets that offer two huge benefits.

  1. Today’s investment universe presents a variety of assets that offer an attractive rate of return with some offering yields that even rival the average historic return of stocks.
  2. Today’s investments offer profits that aren’t confined or limited to a certain economic outcome—you can allocate to assets that will do well in a variety of landscapes including a rising rate environment or even a recession.

By having assets in both buckets, your portfolio is able to incorporate natural hedges and offer true portfolio diversification for a smoother ride—again all in a way that may offer returns that rival stocks.

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