Welcome to Five in Five, a monthly publication from the Investment Team at BTC Capital Management. Each month we share graphs around five topics that illustrate the current state of the markets, with brief commentary that can be absorbed in five minutes or less. We hope you find this high-level commentary to be beneficial and complementary to Weekly Insight and Investment Insight.

This month’s Five in Five covers the following topics:

1. Federal Funds Rate
2. High Yield Spreads
3. Walmart Versus Dollar Stores
4. The “Not So” Magnificent 7 During Q3 2024
5. Large Caps Close Gap Versus Small Caps in Q3 2024

1. Federal Funds Rate

• The Federal Reserve (Fed) lowered the Fed Funds rate 50 basis points (bps) to 5%.
• There was one dissent, the first from a Fed governor since 2005. They preferred a 25-bps cut.
• Fed Chair Powell says the policy path is not pre-determined.
• The median Fed forecast is for another 50-bps reduction by year-end.
• The market is implying closer to 75-bps cuts by year-end and additional 175-bps cuts over the next 12 months.

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2. High Yield Spreads

• High yield bonds offer little value at a spread of 2.95% versus Treasuries.
• The 20-year average is 4.9% with 8% routinely pierced during recessions or recession scares.
• The low was 2.33% in 2007, right before the worst drawdown in series history.
• In 2007, it took six months for 2.95% to fall to 2.33%.
• High yield will outperform as long as equities remain resilient, but upside is capped, unlike equities.

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3. Walmart Versus Dollar Stores

• Year-to-date, there has been significant divergence between the performance of Walmart versus other discount retailers such as Dollar Tree and Dollar General.
• There has been continuing pressure on the resilience of lower income consumers recently, causing Dollar Tree and Dollar General to lower their earnings forecasts.
• Walmart, however, has shifted some focus to the segment of relatively higher income consumers, offering product lineups that differentiate itself from the other discount retailers and has seen success in this strategy.

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4. The “Not So” Magnificent 7 During Q3 2024

• Despite the broad index rising during the third quarter of 2024, all but three of the Magnificent 7 stocks experienced negative returns during that period.
• Many of the companies that had provided significant leadership during the first part of the year saw underperformance as investors sought alternatives to the mega cap tech stocks.
• Earnings guidance for the Magnificent 7 remains fairly solid, however, relatively lofty price-to-earnings (P/E) valuations have led investors to rotate into other areas of the equity markets.

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5. Large Caps Close Gap Versus Small Caps in Q3 2024

• In July 2024, the Russell 2000 index significantly outperformed the Russell 1000 index as investors rotated into small cap stocks as an alternative to large cap stocks.
• However, during August and September investors rotated back into large cap stocks as earnings forecasts for particularly the mega cap stocks justified higher P/E valuations.
• Year-to-date, large caps have outperformed small caps. Earnings growth forecasts for large cap stocks outpace small cap stocks. Investors continue to favor the relatively higher potential future growth of large cap stocks.

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Sources: BTC Capital Management, Bloomberg, FactSet
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

This document is intended for informational purposes only and is not an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of  principal. Investments are not FDIC insured and may lose value.