2024 3rd Quarter Investment Review

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Wade Financial Advisory

In our quarterly investment update, we’d like to:

  • Summarize market activity over the 3rd quarter of 2024
  • Discuss upcoming portfolio changes within private credit investments
  • Provide various market returns information

Market Summary for the 3rd Quarter of 2024

The third quarter presented a generally positive landscape for financial markets, with some shifts in performance within asset classes.  Throughout the quarter we observed a rotation in market leadership within equities, and significant developments in the Federal Reserve’s monetary policy.

Equity markets continued to thrive throughout the quarter, ending the period with a quarterly return of ~5.9% for the S&P 500, and a one-year return of ~36%.  In contrast to recent history, small-company stocks represented by the Russell 2000 index delivered a ~9% return, outperforming the S&P Technology Select Sector Index, which returned ~0% for the quarter.  This disparity in performance may reflect some optimism for relief for the most interest-rate sensitive segments of equity markets, which have been constrained by high borrowing costs in recent years.  International markets also performed well, with a ~7.7% return for the MSCI World ex-US index of international developed markets, and an ~8.7% return for the MSCI Emerging Markets index.  Emerging markets benefited from policy changes in China to stimulate their economy after a broad slowdown due to real-estate related debt, including interest rate cuts, and support for the supply of capital to both property and stock markets.

In the bond market, yields fell as investors anticipated potential interest rate cuts.  The yield on the 10-year Treasury decreased from ~4.4% to ~3.8%, reflecting expectations that the Federal Reserve would shift its monetary policy stance.  The Bloomberg US Aggregate Bond index delivered a total return of ~5.2% for the quarter, primarily driven by increasing bond prices, which move inversely with interest rates.

A pivotal moment in the quarter was the Federal Reserve’s decision to cut interest rates by 0.5% percent – the first reduction since March 2020.  The move was largely driven by easing inflation and a slight increase in unemployment rates.  This action prompted a rally in bond prices and contributed to favorable performance in the global equities.

The Consumer Price Index for All Urban Consumers: All Items in U.S. City Average  (CPI) at the end of the quarter reflected a ~2.4% rate of inflation over prices a year ago (Source:  Federal Reserve Bank of Saint Louis), which represents a continued decline from recent high inflation, and the smallest 12-month increase since February 2021.

As we approach the conclusion of another presidential election cycle, we remain focused on managing your investments with a long-term perspective in mind, with the view that investments have the potential to grow over time regardless of the party holding the White House.  Please also feel free to reach out to us with any questions.

Upcoming Portfolio Changes within Private Credit

To build on our prior quarter’s newsletter which discussed the potential benefits of illiquid investments, we would like to discuss upcoming changes within our private credit investments.

For clients utilizing illiquid investments within their portfolios, we will transition from the Cliffwater Corporate Lending Fund (CCLFX) to the Cliffwater Enhanced Lending Fund (CELFX), which is also an interval fund.  While similar in name, we perceive the Enhanced Lending fund to have less reliance on traditional corporate debt to generate returns, and the potential to deliver modestly higher returns over long time periods.

Over the three years since we added the Cliffwater Corporate Lending Fund, the fund has delivered an annualized return of ~10.4%, in contrast to an annualized return of negative ~3% for the US bond market, as represented by the Bloomberg US Aggregate Index.  Elements that contributed to the favorable performance included the strong performance of the US economy, which buoyed the creditworthiness of the companies borrowing funds, and the floating rate nature of debt within the fund, which benefited from rising interest rates in recent years, in accordance with our expectations.  While we appreciate the strong performance of this investment in recent years, we place greater value on the potential diversification benefits of the Enhanced Lending Fund, in combination with the potential for slightly higher returns during a period which may present stable or declining interest rates.

As part of Cliffwater’s ~$40B private debt advisory business, their team has extensive knowledge of the array of investment types across the private debt universe, including less common areas including venture debt, royalties, litigation finance, and asset-based lending, and access to what we consider to be leading investment opportunities within these areas.  The following chart summarizes the diverse range of investments within the Cliffwater Enhanced Lending Fund.

The next quarterly redemption opportunity for our existing investments in the Cliffwater Corporate Lending Fund will take place in November, at which time we will seek to redeem our existing investments, and subsequently purchase the Cliffwater Enhanced Lending Fund. Please reach out to us if you have any questions regarding this change, and we’d be glad to discuss it further.

Market Returns for the 3rd Quarter of 2024

 

Market Returns Index 1 Quarter 1 Year 3 Years 10 Years
Global Stock Market MSCI All Country World Index Net 6.61% 31.76% 8.09% 9.39%
US Bond Market Bloomberg US Aggregate 5.20% 11.57% -1.39% 1.84%
US Stock Market S&P 500 Composite 5.89% 36.35% 11.91% 13.38%
Inflation Consumer Price Index 0.52% 2.34% 4.70% 2.85%
10-Year Treasury Yield 3.81%
Returns as of 9/30/2024, for trailing periods.  Returns for periods over one year are annualized.

 

If you would like to review any aspect of your investments or have any questions regarding this message, please contact us and we would be glad to discuss further.

Thank you,

The Wade Financial Advisory, Inc. Team

 

Portfolio commentary pertains only to portfolios directly managed by Wade Financial Advisory, Inc.  Please reach out to us if you would like to discuss a change in management of any portfolio not directly managed by Wade Financial Advisory, Inc.

This communication contains the opinions of Wade Financial Advisory, Inc. about the securities, investments and/or economic subjects discussed as of the date set forth herein. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENTS BEAR RISK INCLUDING THE POSSIBLE LOSS OF INVESTED PRINCIPAL.

 

Wade Financial Advisory, Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at www.advisorinfo.sec.gov. Please contact Wade Financial Advisory, Inc. at (408) 369-7399 with any questions

This communication contains the opinions of Wade Financial Advisory, Inc. about the securities, investments and/or economic subjects discussed as of the date set forth herein. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENTS BEAR RISK INCLUDING THE POSSIBLE LOSS OF INVESTED PRINCIPAL.

Wade Financial Advisory, Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at www.advisorinfo.sec.gov. Please contact Wade Financial Advisory, Inc. at (408) 369-7399 with any questions.

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