Q3 Commentary: Economic Resilience Amid Unforeseen Events
Every quarter is full of news about the labor markets, inflation, consumer and business spending, corporate earnings accompanied by unanticipated events. Each of these could potentially move the markets. Yet in some quarters, the news and events have negligible effect, and the quarters feel boring. The third quarter of 2024 was not a boring quarter, and more things happened in those three months than what has occurred in some years. In the end, and despite the numerous negative reports, the third quarter was a positive for the economy, the markets, and permitted some companies to become even stronger through unexpected cybersecurity events. This month is cybersecurity awareness month, giving us a great opportunity to discuss the importance of technology and awareness.
Third Quarter Review
In the face of current events, including a presidential candidate dropping out of the race, two attempted assassinations on another, and escalated fighting in both Ukraine and the Middle East, the economy, stocks, and bonds still endured. Early in the quarter, labor markets and consumers generated negative news, including the news of July and August job creation plunging from prior reports, coming in well below expectations. Lower job creation coupled with an anticipated slowdown in consumer spending created fears that the economy would drop into recession. Adding to these fears was the Fed holding interest rates in very restrictive territory into September.
Business spending, on the other hand, remained strong, with estimates looking at a growth rate more than 3.5% year-over-year, which helped GDP growth to remain on an upward trend. The expected slowdown in consumer spending did not fully materialize given the actual growth of about 3%. The strength of both business and consumer spending contributed to a rebound in the labor markets as jobs increased by over 250,000 in September, further pushing the unemployment rate down to 4.1%. The growth in labor markets gives confidence that the economy will continue to expand in the fourth quarter and into 2025. The stock market has anticipated the continued resilience in the consumer and economy as U.S. large cap stocks increased about 5.9% in the quarter. The bond market also posted positive returns as yields declined and prices increased pushing returns up 5.2%, as shown in the charts below.
On a different, but not entirely separate note, October is cybersecurity month. With more personal, financial, and professional data being stored online – from banking and shopping to managing confidential information – the risk of cyber threats continues to grow. In a recent writing, our COO, Andreas Steven, highlights the necessary ways to safeguard your data against hackers – especially when they are using phishing techniques. You can find the full article on our website under the “Connections” tab.
A recent, and unexpected, example within the cybersecurity industry this quarter was when CrowdStrike sent an update of their protection system that had a mistake in it. That mistake froze more than eight million computers across multiple industries including banking, health care, and airlines. CrowdStrike produced the fix within minutes, but it took hours to get most businesses back up and running because the repair had to be installed manually. A mistake like this could potentially send a company into bankruptcy given the widespread shutdown of systems.
CrowdStrike will likely be able to survive this mistake because CrowdStrike has a competitive advantage protecting the business. CrowdStrike’s system is an artificial intelligence platform which learns and improves the more cyberattacks it sees. Expanding on this, the more clients CrowdStrike has, the more attacks its system will protect against, the deeper the system learns and improves against future attacks for all clients. CrowdStrike sent out a fix within minutes of the update being sent out, then they created rules for every subsequent update, reducing the probability that this will happen again. The early indications following the outage are that CrowdStrike may lose clients, but their client acquisition pipeline remains full, ensuring that their system will continue to learn and become better at protecting client’s computer systems. This is why we want to invest in companies with a competitive advantage, bad things happen to every company; those with an advantage are likely to power through the problem and become stronger in the process.
We are not recommending the purchase of shares of CrowdStrike without doing your own research; we are simply describing what happened with the update and that we believe CrowdStrike will survive because of the advantage. It’s essential to consult with your advisor about your specific situation and portfolio. Our team is here to support you with all your investment needs.
Clinton S. McGarvin, CFA, is a Senior Portfolio Manager. Clint is a part of the investment team covering Global Equities, Fixed Income and Real Estate Investment Trusts. He is involved in all aspects of managing client portfolios and has worked in the investment industry for more than 16 years with a strong track record of equity research, portfolio management, and client service. To speak with Clint McGarvin, please contact our office at (503) 292-1041 or via email at info@allentrust.com.