It’s been a noisy year with the headlines, but the underlying economic picture keeps sending a calmer signal. Business surveys across major economies continue to point in a healthy direction, and a growing number of companies are seeing earnings grow. That broadening strength is one of the more encouraging trends we are watching and it’s a big part of why markets have performed well so far this year.
You may hear that September is historically the stock market’s weakest month. It’s true that going back to 1926, the S&P 500 averaged a small decline in September. But that average is skewed by a few genuinely severe events such as the 1931 banking crisis, the 1974 oil shock, and the 2008 financial crisis. Leave those out and the average September looks basically flat. This is a reminder that economic and business fundamentals move markets.. Despite the long list of worries this year (geopolitical events, federal debt, rising bond yields, rich valuations in some AI related stocks and energy risks), U.S. stocks are still up roughly 13% year to date.
The current wave of AI-related spending looks less like a bubble at the moment and more like an investment boom, similar to past infrastructure buildouts like railroads which after repeated investment booms, overbuilding, and overcapacity cycles created lasting economic value We are mindful however, that some of today’s winners are benefiting from supply-shortages that may not last, which is why we favor a diversified mix of quality cash-generating businesses over chasing the hottest trend as we’ve repeatedly mentioned in past letters.
Rather than trying to predict the next market correction, we stay disciplined, trimming positions that have grown large in your portfolio, selling entire positions in companies that have become too rich in price, and adding quality companies when their prices become more attractive.
We recently added three companies we believe fit the mold. In the U.S. large cap portfolio, we added Boston Scientific, a leading maker of medical devices for heart, urological and digestive conditions. Demand is steady and recurring, and the recent decline in the stock has given us a chance to buy a strong, diversified healthcare business at an attractive price. We also added FactSet to the Small-Mid Cap portfolio. It provides financial data and software that financial managers and banks rely on FactSet every day, on a subscription basis. Clients are usually very loyal once integrated within their operations and the business generates a lot of cash. We see it as a durable franchise well positioned to use AI to strengthen its own product. Finally, we also added to the Small-Mid Cap portfolio Tractor Supply the largest U.S. retailer for rural households, selling everything from animal feed to tools across more than 2,600 stores. Softer spending has pressured the stock, but the core need for these everyday goods hasn’t changed and we like the current price.
There is good news for bonds too. High-quality bonds now pay more than they have in almost two decades. Money market funds are now yielding around 3.5%, just enough to keep pace with inflation. Shifting cash into short-term, high-quality bonds can offer better income, lower interest-rate risk than longer bonds, and added stability when stocks get bumpy.
As we head into the final stretch of the year, we welcome the chance to review your Investment Policy Statement and current asset allocation. We would also like to discuss updates in your personal income needs and withdrawal planning, and confirm that your estate planning, account titling, and beneficiary designations support your goals.
Thank you as always for the trust you have in Cardinal Capital.
