The Dow Jones Industrial Average closed up 3211 points, or 8.2% this quarter, to 42330. The S&P 500 closed up 302 points, or 5.5% this quarter, to 5762. The Nasdaq Composite closed up 456 points, or 2.6% this quarter. See MarketWatch for more data.
The main event for markets in Q3 was the Fed initiating a new easing cycle, beginning with a half-percent rate cut during the September Federal Open Market Committee meeting.
On September 18, 2024, Federal Reserve issued the following FOMC statement:
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.”
The US economy has arrived at a new stage of the interest rate cycle. There is no way to predict where inflation or rates are headed, but looking back over the last 15 years shows the possibility of extended low inflation periods. The biggest threats to price levels are US federal debt, conflict in the Middle East and Ukraine, and new threats to escalating tariff policy.
The Bureau of Economic Analysis’s annual update published 9-28-24 revealed that the US economy grew $294 billion more in the five years ended in 2023 than previously reported. What’s striking is how well corporate America has done. The report shows pre-tax profits soared 90% to $4.09 trillion in the second quarter from $2.15 trillion in mid-2020. Over half of the increase, or $1.34 trillion, has come since 2020. Also, profits have risen for six straight quarters, the longest stretch since 2005-2006.
We may be in an extended period in which the dynamism of the United States economy can overcome stark challenges and continue to innovate and grow. With all that has occurred since 2019, the US economy continues to climb the proverbial “wall of worry”.
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For every successful company like Google (GOOG), there are hundreds of names we will never know. Established companies reside in the human mind like profit and growth were assured. Success is a complex combination of talent, timing, and luck. The history and complexity of investing in those who succeed leads us to seek an understanding of how difficult it is at the early stages of company development.
Ten years ago, an investor may have looked at other opportunities. Hypothetically, the investment decision of 10 years ago could have included cell phone chip manufacturer Qualcomm (QCOM) or American multinational consumer goods corporation Proctor and Gamble (PG). Another consideration could have been worker safety, healthcare, and consumer goods producer 3M corporation. The results of the four investments for the ten years trailing through 9-27-24 are:
GOOG 19.11%
QCOM 11.71%
PG 10.54%
MMM 4.92%
Data Source: Kwanti
The four examples above are all incredible companies. Ten years ago, it would have been impossible to make accurate predictions about the prospects of internet search versus cell phone chips or consumer products.
Survivorship bias is a cognitive error in which the human mind mistakenly considers a visible successful subgroup to be the entire group. In other words, survivorship bias occurs when investment success is considered without recognition of ventures that failed or no longer exist.
Google was criticized and doubted at numerous stages of its early development. After the dot-com bubble, its initial public offering didn’t go particularly well. Google ended up cutting its planned IPO price from an original range of between $108 and $135 to a new target range of between $85 and $95.
Google has become so successful that it is now the target of numerous antitrust government scrutiny in Europe and the United States. Artificial intelligence tools that may be more proficient than the established algorithmic search process are also challenging Internet search. Once again, investors can never have certainty, and those lucky enough to own some of these great companies will need patience and perseverance to achieve positive results.
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There has been a recent increase in questionable investment ideas broadcast on televised financial media. One type of advertisement is for specific companies, with brief explanations of their business, followed by the stock symbol and a website to visit for further information.
These companies are often small and speculative. Truly attractive investment ideas tend to naturally gather investor capital. Markets are relentless in funneling money to areas that present sustainable profit opportunities. There is little need to advertise young companies with potential, as there are many mechanisms in venture capital and early-stage finance for businesses that show promise. There is a long history of gullible money being manipulated into hot tips and promotional storytelling.
A newsletter company has recently been advertising that it made a timely prediction of a stock that went up dramatically. Advertising one stock pick and suggesting that newsletter subscribers are reaping the rewards is misleading. All the other analyses and stock picks that the given newsletter made are left out of these stilted advertisements. There is no mention of how many picks were made or what the average suggestion has produced.
Specific investment ideas, stock tips, and investment strategies require a lot of work to purchase, assess, and implement. Quality research companies sell valuable material, but that is only a starting point. Taking action and persevering through initial jitters and ups and downs is an entirely different matter.
23andMe is a public company with a novel business concept based on genetic testing and various health data and ancestry reporting tools. It went public in November 2020 during the pandemic frenzy of easy money and trades under the symbol ME.
This business is an example of a speculative health technology idea turned into a public company. Consumer tests don’t have much to offer beyond a snapshot of our ancestors’ roots and confirmation of the traits we often already know about. The catchy name and aspirational scientific endeavor have ended badly.
Concepts that seek to break new ground in novel areas can be disappointing. In the case of ME, there were many problems with the business model that had been glossed over by Silicon Valley hype. It turns out that people were uninterested in much more than a single genetic test. 23andMe is floundering in part because it hasn’t managed to prove the value of collecting all that sensitive, personal information. In February 2021, the stock traded above $16, and it now trades at $.34. Stories like this remind prudent investors to avoid “inventing the wheel.”
One must never forget that business is a brutal crucible of competition. Fickle consumer buying habits, economic shifts, and government policy disruption are just a few external factors that can take intelligent people with big ideas to the bin of failure.
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A glaring area that illustrates novel business ideas creating investment losses is the manufacture of electric vehicles. While the underlying premise of a much simpler mode of transportation and potential environmental benefits make electric vehicles likely the next standard of personal transport, the excitement has gotten far ahead of making actual profits selling them.
Recent progressive federal government policy established significant incentives for electric vehicle adoption. With Tesla blazing a trail, established automakers were drawn like moths. Proclamations of offering all-electric vehicle line-ups and eliminating internal combustion engines were apparent examples of overly exuberant corporate decision-makers. General Motors has committed to completely eliminating internal combustion vehicles by 2035.
Consumer auto manufacturing is one of the most challenging business endeavors there is. Global competition, engineering, and extensive labor force management are monumental challenges. There is now a shifting narrative regarding electric vehicles as consumers question the benefit of electricity versus the ubiquitous availability of gasoline. EVs are piling up in dealer lots and requiring significant subsidies and incentives for purchase.
High prices and limited features deter the consumer. Refining a core structural change to a product that has evolved over 100 years is extremely difficult. Automakers are now significantly rolling back ambitious plans and offering consumers much of the same products that they have grown to expect for generations.
Numerous examples of manufacturing resistance to the status quo exist throughout economic history. In 1970, the US Congress passed the Clean Air Act. It took many years to get the lead out of gasoline. The transition was slow, as retrofitting many existing vehicles would be expensive.
The world started adding lead to gasoline in the 1920s. Lead is an ‘antiknock agent,’ which improves vehicle efficiency and engine performance. It turns clunky engines into smoothly running engines. However, lead has proven to be a toxic pollutant, particularly for children. Using it in gasoline pollutes the air in towns and cities worldwide, significantly impacting human health. American auto manufacturers resisted the additional costs of catalytic converter technology, and the process of removing lead from our air was drawn out and took years longer than it should have.
Many products we take for granted as fixtures of modern life have taken decades to realize their commercial potential. The early personal computer was offered to the masses 43 years ago on August 12, 1981, when IBM introduced its personal computer 5150. For $5,240 (a whopping $17,857 in today’s money), you bought a big, bulky three-piece unit (CPU, monochrome CRT, and keyboard) with 16K-256K memory and storage on removable 5-¼” floppy discs. It occupied most of your desktop or kitchen table.
The 5150 did almost nothing when viewed through today’s lens. There was no hard drive storage. To operate the early PCs, a user needed to use command-line interactions, no mouse! Software was limited, and application development took years.
Products that transcend to become applicable to the mass market must undergo long periods of development. Despite Tesla’s early success, electric vehicles likely need an extended incubation period. The current tech, including Tesla, is more niche and limited to early adopters. Once there is rapid charging, a more extended range, and a greater understanding of the advantages, we will see real progress in personal transportation innovation.
Excitement and hype are bad words for prudent investors. Investing in young companies, initial public offerings, and speculative ideas is to enter a world of heartbreak. There is no guarantee, even for large and established business equity holders. We can develop confidence in our investment process only through broad diversification across various industries and geographical locations.
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According to Census data, North Carolina’s Research Triangle is one of the fastest-growing areas in the U.S., with a population that’s boomed by 5.6% since 2020 to 2.4 million people. Its robust access to talent, a pro-business environment, and a low cost of living have helped it get here.
The area, also known simply as “The Triangle,” is anchored by Raleigh, Durham, and Chapel Hill and their major universities: North Carolina State University, Duke University, and the University of North Carolina at Chapel Hill. They all surround Research Triangle Park, or RTP, the largest research park of its kind in the U.S.
Regions like Raleigh-Durham are positive elements of America and its promise of future opportunity. These parts of society are the result of years of refinement. Knowledge centers spawned by established universities combined with rational government policy create conditions for population growth and economic prosperity.
Hyper-economically productive regions comprise the backbone of growth and opportunity in the United States. The chart below from 2018 illustrates where nearly $7T of economic output was produced.
Rank Metro Area GDP (2018)
#1 New York-Newark-Jersey City $1.77T
#2 Los Angeles-Long Beach-Anaheim $1.05T
#3 Chicago-Naperville-Elgin $0.69T
#4 San Francisco-Oakland-Berkeley $0.55T
#5 Washington-Arlington-Alexandria $0.54T
#6 Dallas-Fort Worth-Arlington $0.51T
#7 Houston-The Woodlands-Sugar Land $0.48T
#8 Boston-Cambridge-Newton $0.46T
#9 Philadelphia-Camden-Wilmington $0.44T
#10 Atlanta-Sandy Springs-Alpharetta $0.40T
Total GDP $6.90T Source: World Economic Forum
Frequent narratives cite California as infested with progressive government overreach. Infrastructure, natural resources, and societal difficulties are relentless. Much less mentioned is that California’s economy would rank as the fifth largest country in the world when measured by economic output. Once again, ignorance and oversimplification override economic realities.
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Conservative political leaders, ideology, and policy have been relegated to a state of near irrelevance. A combination of celebrity and GOP weakness has created a powerful cult of personality that has been broadcasting grievance and radical views for nine years. This has profoundly impacted our political system. A vacuum has been created among traditional conservative principles such as free trade, post-World War II alliances, and concerns regarding fiscal sustainability. One might say that Democrats have become the establishment, and the GOP is the party of radicals.
In 1999, David Dunning and Justin Kruger of the Cornell University Department of Psychology produced a fascinating study on intelligence and the struggle for people to grasp what they do not know. The Cornell University Website notes: “His research focuses primarily on the accuracy with which people view themselves and their peers. In his most widely-cited work, he showed that people tend to hold flattering opinions of themselves and their decisions that cannot be justified from objective evidence—a phenomenon that carries many implications for health, education, the workplace, and economic exchange.”
As Dunning describes it, “What’s curious is that, in many cases, incompetence does not leave people disoriented, perplexed, or cautious. Instead, the incompetent are often blessed with an inappropriate confidence, buoyed by something that feels like knowledge.”
“The problem isn’t that voters are too uninformed. It is that they don’t know just how uninformed they are. They have little insight about the cracks and holes in their expertise. People with severe gaps in knowledge and expertise typically fail to recognize how little they know and how badly they perform. The knowledge and intelligence required to be good at a task are often the same qualities needed to realize that one is not good at that task—and if one lacks such knowledge and intelligence, one remains ignorant that one is not good at that task. This includes political judgment.”
Presidential campaigns are most impacted by intangibles such as charisma and vague notions of “likability.” Policy proposals are always subject to the laborious process of passing actual legislation. The power of an established public figure has encapsulated our public perceptions and discourse like a nine-year season of The Apprentice.
This commentary would argue that a wave of misdirected grievances has empowered this personality cult dynamic that began in 2015. Many voters will always be dissatisfied with their perception of the federal government. The notion of Washington, D.C. is distant and mired in complexity and the challenges of modern society.
The potential disruption of another Trump presidency is extremely difficult to forecast. The impact of a Harris presidency is also unknown. As we enter the final stretch, it is easy to underestimate how resilient the American system is. The wheels of justice and political movements grind slowly and test our society. Other populist movements have faltered as Boris Johnson was dispatched in the UK and banished Bolsonaro in Brazil. We may be in the end game of this strange phase of American Politics.
Over 100 former staffers and national security leaders from past Republican administrations endorsed Vice President Kamala Harris on Wednesday, September 18, 2024. It is quite unusual for people to speak out against their own party, but this is a unique stretch where the right wing has been pulled so far from its core principles. This commentary agrees with the statements in the following excerpts of the letter.
Republican Former National Security Leaders Statement of Support for Vice
President Harris
We are former national security and foreign policy officials who served in the
administrations of Presidents Ronald Reagan, George H.W. Bush, George W. Bush,
and/or Donald Trump, or as Republican Members of Congress. We have served in the
White House, the Departments of Defense, Treasury, State, Justice, Homeland Security,
Commerce, and other agencies and in Congress.
We believe that the President of the United States must be a principled, serious, and
steady leader who can advance and defend American security and values, strengthen
our alliances and protect our democracy. We expect to disagree with Kamala Harris on
many domestic and foreign policy issues, but we believe that she possesses the
essential qualities to serve as President and Donald Trump does not. We therefore
support her election to be President…
We appreciate that many Republicans prefer Donald Trump to Kamala Harris, for a
variety of reasons. We recognize and do not disparage their potential concerns,
including about some of the positions advocated by the left wing of the Democratic
party. But any potential concerns pale in comparison to Donald Trump’s demonstrated
chaotic and unethical behavior and disregard for our Republic’s time-tested principles of
constitutional governance. His unpredictable nature is not the negotiating virtue he
extols. To the contrary, in matters of national security, his demeanor invites equally
erratic behavior from our adversaries, which irresponsibly threatens reckless and
dangerous global consequences.
In short, Donald Trump cannot be trusted “to support and defend the Constitution of the
United States against all enemies, foreign and domestic . . . and bear true faith and
allegiance to the same. “We believe that Kamala Harris can, and we urge other
Americans to join us in supporting her.
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The Illusion of Moral Decline, Published: 07 June 2023 in Journal of Nature, states: “…people in at least 60 nations around the world believe that morality is declining, that they have believed this for at least 70 years and that they attribute this decline both to the decreasing morality of individuals as they age and to the decreasing morality of successive generations. Next, we show that people’s reports of the morality of their contemporaries have not declined over time, suggesting that the perception of moral decline is an illusion.”
“The social fabric appears to be unravelling civility seems like an old-fashioned habit, honesty like an optional exercise and trust like the relic of another time. Some observers claim that “the process of our moral decline” began with the “sinking of the foundations of morality” and proceeded to “the final collapse of the whole edifice”, which brought us “finally to the dark dawning of our modern day, in which we can neither bear our immoralities nor face the remedies needed to cure them”. But as apt as this description of our times may seem, it was written more than 2,000 years ago by the historian Livy, who was bemoaning the declining morality of his fellow Roman citizens. From ancient to modern times, social observers have often lamented the ugly turns their societies have taken, and have often suggested that a recent decline in morality—in kindness, honesty and basic human decency—was among the causes.”
“The illusion of moral decline may also leave people dangerously susceptible to manipulation by bad actors. Research shows that people are especially influenced by ‘dynamic norms’, which are perceived changes in customary ways of behaving. If low morality is a cause for concern, then declining morality may be a veritable call to arms, and leaders who promise to halt that illusory slide—to “make America great again”, as it were—may have outsized appeal.”
“One reason they may have held these mistaken beliefs is that they may typically have encountered more negative than positive information about the morality of contemporaries whom they did not personally know, and the negative information may have faded more quickly from memory or lost its emotional impact more quickly than the positive information did, leading them to believe that people today are not as kind, nice, honest or good as once upon a time they were.”
This study is another example of the mental mistakes that the human brain is subjected to. Our myopic view of our personal time in society makes broad conclusions about complex phenomena that most know nothing about. People think that themselves, their family, and close friends are all moral and quality human beings. Yet somehow, people have strong views about the masses of people they have never met.
Why do we believe that society is worse than it is? We have a negativity bias. We pay much more attention to bad events or emotions than good ones. This is a survival instinct; we need to detect threats. We often remember the past more warmly than is warranted. The emotional power of a positive experience can stay with us longer than negative experiences.
There’s another in the long line of thinking errors that may be a “broad concept illusion”. People have all kinds of opinions and theories based on intuition, suspect media, and often little else. The economy’s machinations, political trends, and the innovation toward cleaner energy are all incredibly complex phenomena that people seem to think they understand. Ironically, while our perception may feel like the world is declining, it is fundamentally improving. It is difficult to appreciate all the improvements amongst all the noise and difficulty of human progress.
Prudent investors know for sure that they don’t understand so much of what is and what will be. They approach complex questions with a framework of open-minded information aggregation. Like social scientists or economists, successful investors gather data from a humble perspective that there is so much that cannot be known. We then add in patience, more patience, and all the courage that we can muster in the face of the complexity of our world. The rewards only come over long periods with lots of difficult challenges along the way.