NEWSLETTER

The markets were volatile again this past quarter due to political turmoil and mixed economic reports, which created uncertainty. However, solid earnings growth and the 0.5% interest rate cut kept the market climbing. The ongoing debate revolves around the possibility of a soft economic landing versus concerns about a potential recession. While anxiety has increased, the markets finished the quarter with solid returns across most sectors. 

The July volatility, which caused some unease, was primarily driven by an intense rotation out of  technology-heavy sectors into other areas such as utilities, financials, and industrials. For the first time in a long while, value investments outperformed growth, an important development that hopefully signals continued economic growth. This was a significant shift from the second quarter when growth massively outperformed value. 

In our second-quarter newsletter, we discussed the Federal Reserve’s goal of limiting inflation while avoiding a major slowdown in the economy. Some analysts questioned the Fed’s decision to wait until September 18th to make the widely anticipated rate cut. You may remember the now-infamous statement made by Fed Chairman Powell in early 2021 when he said, “inflation is transitory.” We believe the Fed is on the right course this time. 

As mentioned in our second-quarter newsletter, only 6 out of 11 sectors had positive returns. However, the recently completed third quarter saw 9 out of 11 sectors with positive returns. Another welcome result of the interest rate cut was the outperformance of small-cap securities over large-cap securities. Investors have rotated out of large-cap stocks and into more economically sensitive small-cap stocks, which historically benefit the most from interest rate cuts. Notably, this was the first rate cut in four years, and it came with the promise of future cuts. 

This rate cut is expected to initiate a new rate-cutting cycle. Interest rates had been held at a 23-year high for 14 consecutive months leading up to September 18th. Why was this rate cut so important? Rate cuts stimulate many areas of the economy that have been under pressure. The real estate industry is a prime example, as lower mortgage rates and reduced costs lead to increased consumer demand. 

While my preferred investment category remains Closed-end Funds, which we covered extensively in our second-quarter newsletter, we continue to use Structured Investments customized for BBPWM through a competitive bid process with some of the best-known investment banks in the world. We have added additional small-cap indexes to our Structured Investments, as they typically offer higher caps while maintaining the same 10% downside protection. Please remember that these notes carry investment risk if any of these companies were to liquidate, so it’s important to diversify our holdings. 

At present, we hold Structured Investments through Bank of America, Bank of Montreal, Citigroup, JP Morgan, Goldman Sachs, Jefferies, UBS, Morgan Stanley, Royal Bank of Canada, and TD Bank. Additionally, we have considerable investments in Defined-Outcome ETFs. However, recent pricing has caused us to commit fewer funds to this area compared to previous years. There is no credit risk associated with these structured ETFs. 

For many of our accounts, we also employ Covered Call Writing, which provides positive returns in unchanged markets, some downside protection, flexibility, and potential tax advantages. Like, Structured Investments, there is a maximum upside return at maturity with these option-writing programs. Recently, we have extended our covered call maturities to increase unchanged returns and enhance downside protection. We are making these investment decisions as we foresee greater uncertainty moving forward. 

Please feel free to reach out if you have any questions about these investments or our overall investment process. 

What should we expect during the 4th quarter now that the rate-cutting cycle has begun? While we don’t have a clear answer on the size or timing of future cuts, we certainly understand the anxieties some Americans feel due to current geopolitical events, the contentious presidential election, inflation, rising living costs, uncertain future corporate earnings, labor strikes, employment concerns, and overall economic stability. As long-term investors, we believe that employing downside protection methods, as described above, is critical to helping us stay invested. Patience is key, and we must stick to the plan we’ve worked out with you, which is based on your unique financial position, risk tolerance, and investment timeline. 

I’ve received great feedback from those who have used our retirement, financial, tax, and other planning services. I believe most clients would extol the benefits and encourage others to take advantage of these services. I invite you to learn more about this aspect of our wealth management firm. 

On a personal note, my wife and I recently returned from an 11-day trip to London to celebrate our 50th wedding anniversary. I continue to work full-time because I love what I do, and I truly appreciate the entire team at BBPWM and all of our clients who have made this journey possible. Many of these clients have been with me for over 50 years. 

Please rest assured that our growing team remains dedicated to helping you achieve your financial goals. Do not hesitate to contact us with any questions, comments, or to schedule an overall financial or portfolio review. 

Sincerely,
BBPWM

Scott and Susan Miller in London