2024.Q3 PERFORMANCE
3rd Quarter Recap
In the third quarter of 2024, investors saw the stock market set new all-time highs and bond yields fall to their lowest level in over a year. With several big moments, the main event was the first interest rate decrease from the Federal Reserve in September. Most client portfolios outperformed by a significant margin for the quarter and the year to date due to positions in the Utility, Real Estate, and Industrial sectors.
The SP500 gained 5.25% in the third quarter, bringing the year-to-date gain to 20.81% while the Bloomberg Bond Index gained 5.2% in the quarter bringing the year-to-date gain to 4.4%. Stocks indices reached new record highs and in a sign of market health an increasing number of stocks participated in gains. Several themes emerged during the quarter, the biggest being energy transition. Due to the increasing need for power, largely driven by Artificial Intelligence (AI), utility stocks saw the greatest appreciation of any sector during the quarter (+19%). AHIA identified this trend early in the year and has favored the utility sector in client accounts with positions such as Constellation Energy (+30% in the quarter), GE Vernova (+49% in the quarter) and NextEra Energy (+20% in the Quarter). Largely due to the performance of these stocks, many clients’ accounts have outperformed their benchmarks gains for the quarter and year. Another positive factor for stocks is lower interest rates. The highly interest rate sensitive to the Real Estate sector gained 17% during the quarter. Many clients’ accounts hold one real estate company, Highwoods Properties, that leases high-end corporate office building that gained over 29% in the third quarter.
SP500 Near All-Time Highs
The third quarter also saw minimal losers. The biggest loser was EQT, a natural gas provider, whose stock fell in tandem with natural gas prices. This position has been eliminated from clients’ portfolios. Other positions decreased include Nvidia and Microsoft, who reported strong financial results, but the good news was already anticipated by investors, and Eli Lilly whose stock has struggled as competition increases. Lastly, we decreased Chipotle Mexican Grill before they reported a rough quarter, after their CEO departed from the company causing the stock to fall further, we bought more.
On a broad level, SP500 had a strong second quarter earnings season. The earning results matched revenues forecasts while profits surpassed analysts’ expectations. The best performing sectors were Utilities (+19.28%), Real Estate (+17.46%) and Industrials (+12.39%). AHIA has favored each of these sectors, leading to outperformance in most clients’ accounts. Each of these sectors benefitted from the first decrease in interest rates, and with lower rates on the horizon we see room for continued appreciation. While many technology stocks related to AI outperformed in the first half of the year, such as Nvidia (NVDA), the second-tier suppliers, like Utility companies, have outperformed thus far in the second half.
Constellation Energy, our largest holding and the second-best performing stock in the SP500 this year, was the biggest winner in client accounts. This stock has been held since early 2024.
In the bond market the 2-year treasury yield dropped to 3.65% and the 10-year treasury dropped to 3.8% at the end of quarter. It is no surprise the yields dropped leading up to the first interest rate cut in late September. Lower yields theoretically mean higher stocks, which has held true for the most part. Most clients are positioned in bond ladders that have benefitted from falling interest rates. Investors have also held huge positions in Money Market Funds, but with yields falling, achieving the same yield requires a savvier approach.
Treasury yields dropped during Q3 (2-year yield: Green, 10-year yield: Blue)
The focus on the economy during the quarter switched from inflation to hyper-fixation in the job market. On inflation, Jerome Powell essentially declared victory when he said he believes inflation is moving sustainably toward the Feds 2% goal. Believing that inflation is under control, the Fed decided to decrease rates on September 18th. Not only did the Fed decrease their interest rate, but they cut it by 0.5%, not the 0.25% that is typical. This lowered the overnight rate charged to banks from a range of 5.25-5.5% to 4.75-5%. This was a big move, but more importantly signaled that there are more cuts to come. The market is currently expecting the Fed to cut another 1% by the end of 2024. The trend of rates is clearly decreasing through the end of 2024 and pending any dramatic changes in the economy, through 2025 as well. The focus is now on the labor market to see if the Fed has achieved a “Soft Landing”, when inflation comes down without breaking the labor market.
Inflation (CPI in white line) and Interest Rates (Fed Funds red line) both falling
Maximizing Charitable Giving:
Three Tax-Deductible Strategies
With the end of 2024 approaching, we are thinking about strategies to reduce income taxes. Supporting charitable causes can be a tool to reduce your income taxes. With the recent damages throughout several states from Hurricane Helene, there is no shortage of need for charitable support. Most clients have large unrealized capital gains in their taxable accounts, which would be an ideal funding strategy that avoids capital gains taxes if the security were sold. Below, we highlight several charitable giving tax strategies, although there are others that are more complex. Charitable giving not only benefits the causes you care about but can also provide significant tax advantages:
1. Donor-Advised Funds
A Donor-Advised Fund (DAF) allows donors to make a charitable contribution, receive an immediate tax deduction, and recommend grants from the fund over time. If the donation amount is large enough to surpass the standard deduction, clients can itemize their deductions and potentially reduce their taxable income. This technique is excellent in a year when your income is high, and you already have significant itemized deductions such as health care or casualty losses from storms. For example, you may wish to establish a DAF for $25,000 with the donation of highly appreciated Nvidia stock. Then, over each of the next five years, you make grants from your DAF of $5,000 each year to your favorite charities. Andy uses this technique to support Captains for Clean Water.
2. Qualified Charitable Distributions from IRAs
For clients aged 70½ or older who are required to take minimum distributions from their Individual Retirement Accounts (IRAs), making a direct donation to a qualified charity can be a tax-efficient strategy. By transferring funds directly from the IRA to the charity, clients can avoid recognizing the distribution as taxable income, which can be particularly beneficial for those who do not need the extra income or wish to minimize their tax liability.
3. Charitable Gift Annuities with Appreciated Securities
Clients holding highly appreciated securities can benefit from donating these assets to a charity through a Charitable Gift Annuity (CGA) program. By doing so, they can receive a lifetime income stream and a significant tax deduction. The donation of appreciated securities also allows the donor to bypass capital gains taxes, further enhancing the tax efficiency of their charitable giving. The yield based on the amount of gift will depend on your age and if it covers a spouse or partner and is set by IRS regulations, but between 5% to 8% for discussion purposes. When selecting a charity that offers a CGA, be sure to consider the financial health of the organization. Andy has made several gifts using CGA’s to cover his income in the unlikely situation if he were ever to retire.
While these charitable tools can effectively reduce your taxable income, they also offer the valuable opportunity to support the causes you care about most. By leveraging these strategies, you can make a meaningful impact while enjoying the associated tax benefits.
If you would like to learn if these strategies have application to your situation, please call us to either Andy or Jennifer to discuss.
Medicare Enrollment Update
By Stephanie Anderson
Medicare Consultant
The 2024 Medicare Annual Enrollment Period (AEP) is fast approaching. It is a time each year when Medicare beneficiaries can change their coverage options. The AEP runs from October 15 to December 7, and any changes made during this time take effect on January 1 of the following year.
To meet your Medicare needs, be sure to note if you have or will have updates to your health information for the 2025 Plan Year.
- New prescription drugs – are they on the formulary next year?
- New doctors or healthcare providers – are they in network next year?
- New chronic health conditions
- New address, phone number or email
- Other changes or concerns.
Historically, a small share of Medicare beneficiaries compared coverage offered by different plans during open enrollments periods; 18% in Medicare Advantage plans and 27% in stand-alone Part D drug plans. Many “blindly” re-enroll in their current plan, acknowledging better options may exist. Such participants report frustration, confusion, uncertainty, and feeling overwhelmed.
There will be significant changes to Medicare in 2025 that could impact the review of your Medicare Advantage or Medicare Part D prescription drug plan. For example:
- Medicare Part D Deductible Increase
- Out-of-Pocket Cost Cap (great for those with high medicine expenses)
- Elimination of the Coverage Gap (Donut Hole)
- Payment Plan Option – allows for breaking up large drug costs into monthly payments
- Part D Premium Changes – caps the increase in Part D premiums and more ….
If you have a personal Medicare insurance agent and haven’t been in touch each October, this would be an important year to do so. If you don’t have someone to help with wading through the weeds, there’s help for you. AEP is the time for deciding whether your current plan is still the best option or if there are untapped benefits in the coming year that will better address your current health needs. Don’t leave it to chance. Get your questions answered.
If you would like to chat, you may text, call, leave a message or email and we will arrange a time meet.
4th Quarter and Beyond Outlook
The overall conditions are favorable for further gains in the financial markets:
- Interest rates: The Federal Reserve has lowered interest rates, which is a positive sign.
- Corporate Earnings: Companies are seeing growing earnings as profit margins expand.
- Inflation: Inflation is moderating and is under 2.5% from a year ago.
- Economic growth: The economy continues to grow, with 4th quarter GDP growth projected at 2.0% and 2.6% for 2025, based on Bloomberg consensus estimates.
Historically, the 4th quarter is the strongest for stock performance.
With the S&P 500 up over 20% and the bond market up over 4% for the year to date, the positive factors mentioned are already factored into expectations. However, continued momentum and over $6.4 trillion in money market accounts could provide the catalyst for further gains.
Our favorable bias towards the stock and bond markets this year has fully invested most clients’ portfolios so far in 2024. However, there are several risks that could impact returns in the 4th quarter:
- Labor strikes pose a threat to supply chains and inflation.
- Higher interest rates in Japan reversing the ability to borrow at a low rate and invest in stocks.
- Broadening of wars in the Middle East and Ukraine-Russia.
- The U.S. Presidential election process catalyzes a similar January 6th scenario.
- Disruptions from Hurricane Helene and other weather events.
- Any unforeseen issues that may surface.
While there are many risks that we encounter, being a small firm that is constantly monitoring the financial markets allows us to make changes quicker than our larger competitors.
Bloomberg Intelligence: Financial Market Checklist
The economy continues to grow as inflation moderates, led by consumer spending and capital expenditures associated with government stimulus in the Inflation Reduction Act, Chips Act, and the infrastructure bill. Given the tax benefits in these bills, businesses were motivated to invest to capture significant tax incentives. Further, lower interest rates may pick up real estate construction and transactions that have declined in recent years. Concerns that may detract from growth expectations include environmental issues such as the destruction from Hurricane Helene, labor strikes, and moderating global economic activity, namely in China and Germany, which may impact export sales.
GDP looks to grow at a moderate pace according to Bloomberg estimates
Given the positive economic and financial market conditions, most clients’ portfolios are fully invested. While we can change our outlook quickly if circumstances warrant, portfolios are favoring equities over bonds due to significant appreciation this year. Although fixed income has a defensive role to play in providing predictability and stability, highlights of our thinking on investment strategy follow.
For the fixed income portion of clients’ portfolios, we continue to build on the core bond ladder of high-quality corporate, government, and municipal issues. As we have been reviewing client portfolios in detail, we have added to bond ladders funded by taking funds from equities. To complement the core bonds, most portfolios hold preferred stocks. Preferred stocks have performed better than the bond market this year as the attractive yields have captured investors interest.
Shifting to the outlook for the equity markets, our strategy is to stay with current positions. For our sector positioning, we have a large overweight position in Utilities and Industrials surrounding the theme of electricity production to power Artificial Intelligence (AI). In Healthcare, we are about equally weighted but looking to add a few smaller innovative companies. Surprising to many clients, most portfolios were dramatically underweight in Technology, though we are holding the sector leaders of Apple, Microsoft, Nvidia, and Motorola Solutions. Constellation Energy remains our largest holding across all client portfolios. As the leader in nuclear energy, the company is in the leading position to partner with data centers to supply carbon-free reliable electricity. We continue to hold positions in the top technology companies including Microsoft, Apple, Nvidia, and Amazon, although our weightings are 22% of our equities much lower than 32% in the S&P 500, our equity benchmark. During the quarter, we increased the holding of Motorola Solutions and added a position in Axon. Both companies are providing advanced technology to local and state government agencies, focused on police and emergency services. Healthcare holdings reported strong financial results. Eli Lilly reported a sales gain of 35% and profit increased 85% on the back of their diet drugs and other innovative new drugs in diabetes, Alzheimer, and Crohn’s disease. Despite the strong financial results, the stock has not performed well recently, thus we have reduced the position. Intuitive Surgical reported strong results led by a 17% increase in procedures using their DaVinci robotic surgical systems. Their stock is trading at all-time highs. The Biotech sector has lacked performance for a decade but may be slowly picking up. During the quarter, we added United Therapeutics, a provider of pulmonary hypertension drugs and developing several other life-changing solutions for artificial organs.
Disclosures
Andrew Hill Investment Advisors, Inc. is registered as an investment adviser with the Securities and Exchange Commission (SEC), and only transacts business in states where it is properly notice filed, or is excluded or exempted from such requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Sources of our Client Letter include Bloomberg, Wall Street Journal, Barron’s, corporate disclosures of the companies mentioned in this document, and internal research.
OUR TEAM
Andrew “Andy”
D. W. Hill, CFA
President and
Co-Founder
Jennifer R.
Figurelli, CTFA
Managing Director
and Co-Founder
Elicha D.
Moore
Client Concierge
Representative
Sean
O'Brien
Associate
Portfolio Manager
