Q3 2024 MARKET COMMENTARY
The third quarter of 2024 presented a few spastic moments with the largest sell-off ever in Japan’s Nikkei in the first day of August and a few days of elevated volatility in the first few days of September. Despite these events, the market not only battled back but ultimately ground to new all-time highs on the S&P 500. The Fed also began its long-awaited cutting cycle, lowering the Fed Funds rate 50 bps during their September meeting, indicating that further cuts are coming but not necessarily at an aggressive cadence. We’ve also seen continued geopolitical risk in the Middle East between Israel vs. Iran and its proxies, although none of the violence seems to have affected the price of oil on the global market… for now. While we are pleased to see our client accounts largely hitting new all-time highs during the quarter, we are not particularly bullish on forward returns on many assets as valuations look “Full” outside of select opportunities.
Equity
We’ll lead off with Public Equities as it’s the most talked about area of investing and relevant to just about every investor of our practice. The S&P 500 has had a terrific start to the year, moving up +20.41% through 9/20/24 (YTD), after being up 26% in 2023. The Nasdaq with its tech champions was flat in the quarter rising fractionally to +17.77% through 9/20/24 (YTD), and the Russell 2000 which holds what could be many of the great young companies of the future saw the largest gains of roughly 9% in the quarter coming in at +11.34% through 9/20/24 (YTD). Through 9/20/24 (YTD) Utilities was the top performing sector up +28.60% while Energy was the worst performer at +7.27%.
Our philosophy around owning Public Equities has encompassed the following 1) Focus on owning the best companies – the strategy of indexing, where you effectively own all companies (Great, average & poor) has never made a lot of sense to us 2) Look to invest in what people and companies really need, where’s there’s less competition for profits, and watch for that company’s ability to exercise pricing power 3) Look for businesses that are durable that can survive hard times – stock prices go up and down, but a durable business won’t go bankrupt and will increase in value over each economic cycle 4) Where we feel we have competency, own the individual companies, where we don’t utilize a passive basket like a sector ETF or active management through a mutual fund. Also, as part of our investment philosophy we prefer to invest new capital into areas that are unloved or what I refer to as “Orphaned” and wait for the market to rotate capital into that area. With experience has come the understanding that while the broad indexes represent returns for a broad basket of stocks, under the surface there can be a lot of turbulence sector to sector and stock to stock. We want to position our clients to where we believe the puck will be going and try to arrive there before the herd shows up and bids prices much higher. Q3 proved to be a great quarter for our models as our purchases made earlier in the year in REITs, Utilities, Healthcare and Gold Miners started to significantly outperform the general market, while Tech, which had been driving the market suffered a pullback. The indices however remained on all-time highs despite the selling seen in Tech stocks, telling us that capital didn’t leave the equity market – it simply rotated or spread out into other areas, fortunately those which we owned. As we rounded the turn on Q3, Energy Stocks have been the laggard with oil prices drifting lower due to weakening demand from a flagging Chinese economy, despite the continued violence in the Middle East. While we don’t currently own any oil-related securities (We are instead investing in Uranium as our play on power) we continue to watch the situation as value is starting to develop in that part of the market.
Private Equity for our clients has gotten off to a positive start here in 2024. While the returns are more subdued than those garnered currently in the Public Equity Markets, we believe the returns are in-line with expectations coming into the year and still represent an opportunity to improve should interest rates continue to moderate on a go-forward basis. Rising rates over the last 2 years have caused deal flow to contract substantially as sellers are still longing for the multiples they could get back in 2021 when rates were rock bottom, while buyers are looking for deals (Aren’t we all!). If rates continue to come down, we could see multiples re-rate higher, this could cause sellers to take more assets to market and get deal flow going again. Depending on how the election in November plays out, a change in governance in Washington may also portend to a less active FTC and pushback against mergers/buyouts. Should we see deal activity pick up, we are hopeful that we could see a nice reacceleration in returns in this part of the market in 2025. Over the last 6-9 months, we have been active in increasing our allocation to this space for clients – now we are in the wait, watch and see mode.
Real Estate
Our public REIT investments were big beneficiaries of the rotation we saw in Q3, while we expect that returns will probably moderate a bit here in Q4 in this area, we are bullish on our particular investments over the next 2-3 years as our tower/data center investment reduces debt and accelerates growth in date centers and our niche industrial play looks to get back to making acquisitions which should begin to re-rate growth higher in 2025 and beyond. Our Private REIT investments however are yet to inflect higher here in 2024 with NAV prices still hanging around Q3/Q4 levels from 2021. While the recovery has been slower than we had expected, we still believe it’s coming, therefore we’ve encouraged our clients to keep reinvesting their monthly dividends at current levels and in select cases add to their existing holdings. Most recently we’ve also added a Triple Net Lease Portfolio – one we had become acquainted with as far back as 2022, but we felt the timing was not ideal for that strategy. Given that we’re confident that interest rates have peaked and will continue to moderate as we move forward, we feel now is a better window to add this stable, income producing, long-duration asset to certain client portfolios. The manager is a niche player in this part of the market and has a unique approach of sourcing deals. They research companies who have large real estate portfolios and approach them to see if there’s an interest in selling their real estate assets and then immediately entering a sale-leaseback arrangement. The manager is also very disciplined about its use of financing – typically they will only look to make a purchase of a property if they can purchase it at a cap rate of 1.5% or higher than the financing rate. Their ability to use positive leverage not only gives our investors a yield close to 7% but will also allow for potential capital appreciation opportunities as rates start to moderate.
Debt
Q3 continued to show a move down in rates along the interest rate curve with the largest moves seen in the 2-5 yr. area of the curve. The Fed finally cut rates 50 bps in September immediately knocking down front-end rates. However, while SOFR and other short-term rates fell in lock step with the Fed Funds cut, we noticed a bit of steepening or a rise of the 10- and 30-year part of the Treasury Curve. This will be notable to continue to watch that as the Fed cuts, do we see a rise in longer term rates or not? While we feel rates may rise short term, we’d expect them to settle in around current levels or potentially drift lower if we see any weakness in the global economy. We continue to keep a very high-grade positioning and bias with our Public Debt allocations. If the more negative scenario presents itself, these assets can be a source of funds to reinvest in opportunities in the credit and or equity market – depending on which we find more compelling.
2024, has been a surprisingly strong year exceeding most analysts’ expectations for returns this year. Other than the vol spike that we saw in August, volatility has been very subdued in 2024. Could October change that? We’ll see! Regardless we continue to follow our process of trimming our “Winners” and looking to reinvest into the “Orphans”. We suspect the high level of uncertainty will cause a lot of rotation within the markets as we move through the last quarter of the year and an impending US election.
[1] Bespoke Report 9/20/24
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This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Koa Wealth Management, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. More information about Koa Wealth Management, LLC can be found in our Form ADV Part 2, which is available upon request or by visiting our website at www.koawealth.com/disclosure. Past performance is not a guarantee of future results. All investment strategies have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.
