Market Commentary
Waiting for the Election
Overview- The market moved higher in Q3, with the S&P 500 up +5.8%. The market rally appears to be broadening with Midcap, SmallCap and Value doing as well as if not slightly better than the S&P 500. This is a marked contrast from the first half of the year, where the top 10 names in the S&P, by market cap, were responsible for about 75% of the S&P returns in the first 6 months of the year. (See exhibit 1) However, the quarter was not without volatility as concerns over the “yen carry trade” caused a fast, almost -10% pullback in the market. Valuation/Sector and Style- We still believe that the market is expensive, but begrudgingly “for a good reason”, as signs of a soft landing are clear in the economic data, and the Fed is no longer tightening. We continue to see far better valuations in areas outside of large cap tech and have added exposure to small, mid and international stocks. Exhibit 2 shows that the most attractive area of valuation resides in small/mid-caps and value vs. growth. Further, exhibit 3 shows that irrespective of market direction, when the Fed cuts rates, small caps generally outperform large caps. This view would be solidified by clear signs of an expanding economy, but we believe that current rich valuations support the notion of being invested in areas other than large cap tech. We have also built up some exposure to more cyclical parts of the economy, along with gold [...]