Welcome Investors!

Here’s your Alpha portfolio update for October 2024:

• Returns so far this year +9.12%

• Leading: Silver currently at +34.8%

• Lagging: Check Point Software at 0.74%

• We have 7 new stock positions and 6 stocks sold.

• Total positions: 14
  _{See the investment portfolio for the rest of our positions.}

It was a rocky start to September.

Nvidia plunged 9% on the very first trading day of the month amid a broader pullback in semiconductors. Roping in the last week of August, investors dumped stocks at their fastest pace since November 2020. Selling was led by institutional investors and hedge funds. Although to be fair, ETFs saw unusually high inflows throughout August. 

Why the selloff in stocks?

The latest economic data – especially regarding the labour market - implied slowing growth for the US economy. Fears reemerged that the Fed was behind the curve and the US was heading for a recession. That’s right – recession. The boogeyman that refuses to die and haunts and taunts investors until sleep is elusive and portfolios can only be opened in the company of a stiff drink.

What in blazes is it going to take to relieve this torment?

Oh, right. A rate cut. That should do it.

Inflation vs. Unemployment

Mark down September 18, 2024, in your mental calendar next to the anniversary, baby’s birthday, and the time Beth Bennett said you had chicken legs in high school. That’s the date the Federal Reserve cut interest rates for the first time in four years, putting an end to its longest cycle of rate hikes in roughly a decade. And cut them by a hefty half percentage point.

The Fed has a dual mandate of low inflation and high employment, and it faces trade-offs when trying to achieve those goals. If they raise interest rates to cool down the economy and tame inflation, it may increase unemployment. And vice versa. With the Fed’s long-term target for inflation approaching its goal, and the labour market softening, a pivot was in order.

At the news conference post-decision, Fed Chair Jerome Powell acknowledged that job growth has slowed. "Clearly, payroll job creation has moved down in the last few months and that bears watching," he said. "The upside risks to inflation have really come down and the downside risks to employment have increased."

But he added the economy and job market are still on solid footing.

"Our intent with our policy move today is to keep it there," he said. "The time to support the labour market is while it's strong, not when you start seeing layoffs... You can take this as a sign of our commitment not to get behind."

The Reaction:

Economists, analysts, and assorted talking heads were in general agreement: this was good news.

“This will improve the material well-being of all Americans,” said Joe Brusuelas, chief economist at accounting firm RSM US. “We had three years of extremely aggressive policy out of the Fed. We’re now pivoting toward the normalisation of rates in the post-pandemic economy.”

“Lower rates should bring billions more in long-term investments off the sidelines,” said Michael Madowitz, principal economist at the Roosevelt Institute, “and create thousands more long-term jobs.”

"This was the best news I've heard from the Fed in years," said Jeremy Siegel, professor emeritus at University of Pennsylvania's Wharton School of Business.

The market initially popped, then dropped on the news, closing the session in the red. But overnight, foreign investors began pouring money into the US futures market, and by the next morning, it was off to the races.

What exactly will a 50 basis point interest rate cut mean for the economy?

While not immediate, expect these – and subsequent - rate cuts to eventually lower the cost of credit, impacting mortgage rates, car loans, and the interest charged on credit cards. And if the cuts get more money flowing through the economy, that can translate into expansion for businesses.

But of course, there’s a trade-off: it also will trim bank savings account yields that had finally provided significant returns for savers.

By the end of the month, all three major indices were looking higher, with the Dow Jones Industrial Average notching an all-time high on Friday.

What Does October Look Like?

In a word: volatile. Historically speaking, October is the month with the greatest average stock market volatility. And this year in particular, we’re just days away from a pivotal US Presidential election with potential ramifications for several industries and the market in general.

Beyond the election, the market will remain especially vigilant toward any economic data that could push back against hopes for a soft landing. Adding to the uncertainty, a port strike looms on the East and Gulf coasts, and international tensions seem to escalate daily.

Acknowledging that there are always risks, I remain guardedly optimistic. But here’s what I am doing:

• Double down on our investment and be 100% risk-on, as you can see from our portfolio positioning for this month.

• Stay invested for the last quarter of 2024. I will start cutting back our positions from Q1 2025, anticipating further rate cuts and further recession signals.

And with that, have a great October!

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Ali is the Founder & Editor of The Insider Memo, Follow him on X @ASAInsights