Review & Outlook

Up to this point, future growth expectations have been narrowly focused on a few large companies’ investments in Artificial Intelligence (AI) hardware, and the implied subsequent productivity gains and transformative effect it will have on the economy. Many parts of the industrial economy that play a role in developing AI have benefited as well, particularly those involved in the maintenance of power distribution networks, datacenters and utility infrastructure that have received tax credits due to recent legislation. In moving forward, we expect the rotation towards Quality companies to continue the 3rd Quarter results into the New Year as the market broadens its view and recognizes these relative opportunities.

Other parts of the economy that have suffered from high interest rates such as Housing and Construction will receive much needed relief from lower rates. The Millennial Generation – the cohort that was born between 1981 and 1996 – is now the largest demographic in the US (72 million), and their housing needs will drive a new cycle that boosts the economy and related Quality Growth issues than what we have seen with higher interest rates over the past 18 months. Growth prospects for companies that service this demographic have only started contributing to a broader-based participation in stocks.

As such, our current and expected activity can be summarized as follows:

• Cash reserve targets currently stand at a multi-year low of 10%, while the strong Stock market has pushed actual cash reserves closer to 5%.
• We will continue to utilize treasury bills to supplement cash reserves in the Stock portfolio, as a substitute for the Money Funds your Custodian uses.
• Our buying has outpaced selling by a ratio of 1.25 to 1 over the past year. We continue to make marginal additions and subtractions to the portfolio when opportunities exist.
• Portfolio turnover (buying and selling) has declined compared to the past two years, as we aim to minimize taxes as the markets have continued to making forward progress.
• With interest rates coming down and the slope of the yield curve normalizing, we will shift toward owning bonds equally across different maturities versus sticking to our recent strategy of only buying shorter maturities (less than 3 years).

For the remainder of the year, we expect the following to drive our investment decision process:

• Inflation continues to decelerate through the end of the year, putting the Fed on a glide path to lower rates.
• Interest-rate sensitive sectors (Housing, Industrials, Construction) will continue to price in a rebound over the next year.
• Valuations are above historical ranges for Quality Growth companies, increasing the likelihood of a “pause” in Stock market gains heading into 2025.
• On average, corporate balance sheets remain strong, making a debt-fueled recession look increasingly unlikely.
• A declining Chinese economy and continued malinvestments in battery technology and renewables will continue to affirm our decision to steer clear of this profitless Energy space.
• Labor markets are “soft” but not showing a total collapse in the making. Overall demand looks to be sufficient to prevent mass layoffs.
• Heightened war in Ukraine and the Middle East and an upcoming political election will drive both volatility in stocks and continued government investment in Defense.

With stocks near all-time highs, it is natural to expect stocks to pull back from its strong year to date performance, particularly with a typically volatile Autumn ahead. But we do believe the underlying trend shown in the 3rd Quarter for Quality Growth issues taking a shine over the rest of the market is still in its early stages. As such, we are optimistic as we head towards the end of the year.

Finally, we are excited to share that we have welcomed a new member to our firm, Jeanne C. Goedecke, who joined us in September in the role of Portfolio Manager. Her experience in Corporate Banking on the capital markets desk and her Relationship Management responsibilities over the past 13 years will bring further depth and knowledge to our firm. She is a graduate of Tulane University’s A.B. Freedman School of Business with a bachelor’s degree in finance. In addition, she has achieved the coveted CFA designation. We hope you will have a chance to meet her in person over the coming months.

As always, feel free to call us with any questions, concerns or updates you may have regarding your portfolio.

Warmest Regards,

Daniel A. Kane, CFA
President

Stephen F. Knapp, CFA
Director of Research