Q3 2024 INVESTMENT COMMENTARY
MARKET RECAP
It was far from a quiet summer for the financial markets. Markets have been volatile as investors parsed through economic data attempting to gauge whether the economy will slow, and how much the Federal Reserve would need to lower interest rates to prevent a recession. Toward the end of the quarter, the Fed opted for a bold start to its shift in policy, reducing rates by a half percentage point. This was the first cut since 2020, and Fed Chair Jerome Powell said the larger-than-average cut was intended to show the Fed’s commitment to “maintaining our economy’s strength” in the face a slowdown in the labor market. Year to date, the economy has proven resilient thanks to strong consumer spending, lower inflation, and healthy corporate earnings.
Despite the volatility, the stock market reached new highs with the S&P 500 gaining 5.9% in the third quarter, pushing its year-to-date return to 22.1%.
Notably, there was a rotation out of large-cap growth tech stocks and into a broader range of sectors and styles. The Nasdaq, which led the market higher in the first half of the year, gained 2.8% but lagged other benchmarks in the quarter. Large-cap value (Russell 1000 Value) gained 9.4% and outperformed large-cap growth’s (Russell 1000 Growth) 3.2% gain, and small-caps (Russell 2000) rose 9.3% outpacing large-caps’ (Russell 1000) 6.1% gain. The equal-weighted S&P 500 index (up 9.6%) easily outperformed the cap-weighted S&P 500 during the quarter. At the sector level, traditional defensive sectors were by far the big winners, with utilities, real estate, and consumer staples gaining 19.4%, 17.2%, and 9.0%, respectively.
Internationally, developed international stocks (MSCI EAFE) gained 7.3%, finishing ahead of domestic stocks in the three-month period. Emerging markets stocks (MSCI EM Index) were relatively quiet for most of the quarter but rose sharply in the last week of the period after China announced their boldest stimulus in years in attempt to boost their ailing economy. Emerging-markets stock finished the quarter up 8.7% thanks to a 23.5% gain for China during the month of September.
Within the bond markets, returns were positive across most fixed-income segments. The benchmark 10-year Treasury yield declined from 4.36% to 3.81% amid lower inflation and recession concerns. In this environment, the Bloomberg U.S. Aggregate Bond Index gained 5.0% and credit performed well in the quarter as high-yield bonds (ICE BofA Merrill Lynch High Yield Index) were up 5.5% in the quarter.
Overall, domestic economic and corporate fundamentals remained relatively healthy in the quarter, although rich valuations remain a risk. Looking ahead, the expectation is that the Fed will continue to cut rates this year and next in an effort to guide the economy to a soft landing and avoid a recession.
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