INSIGHTS

October 9, 2024

Market Outlook

Third Quarter 2024

Although it is just the start, the larger than expected cut indicates the Fed is committed to supporting growth.

Markets

Spurred by central bank action, US markets remained resilient in the third quarter. The Fed finally began lowering interest rates in September—14 months after the last rate hike. In response, bonds produced positive returns, and the S&P 500 saw its fourth consecutive quarterly gain. Year to date, the S&P 500 is up 22% after adding 5.9% in Q3. There was a reversal in leadership at the S&P 500 sector level. The most interest-rate-sensitive sectors, Real Estate and Utilities, were the top performers. Gains for Tech and Communication Services were among the lowest in the quarter, yet these sectors remain top performers year to date. Every sector except Energy was positive in the third quarter. Stock breadth improved, with nearly 70% of stocks outperforming the S&P 500 Index.

There were some big moves in commodities throughout the quarter with oil falling -16% and gold rising by 13%. Global markets gained in Q3. Investors welcomed the stimulus plan that China unleashed in mid-September to help hit annual growth targets. The deterioration in China’s economy through the third quarter had ignited fears of a deflationary spiral in the region.

Economy

The Fed has kept rates at the peak longer than is typical and surprised markets by starting the easing cycle with a 0.50% cut rather than the 0.25% cut most expected. The decrease helps those that need it most. Small business loans, credit card rates, auto loans, HELOCs, etc. are tied to the prime rate which

remained at peak levels until the Fed’s cut. Although it is just the start, the larger than expected cut indicates the Fed is committed to supporting growth. Two more scheduled Fed meetings remain in 2024 in November and December.

Although the price level remains high for consumers, inflation data cooled in the third quarter, becoming less of a concern for investors. Goods are deflating. Brent oil prices in September fell below $70 for the first time since 2021.

Softer employment data is now at the forefront of investor risks, but labor has not deteriorated as much as most economists expected at this point in the monetary cycle. September’s jobs report was strong with 254k additions, averaging 185k per month for the quarter. Year to date, the US added 1.8 million jobs through September 2024 compared to 2.3 million in the first 9 months of 2023. Job growth is still healthy. Strong corporate earnings have kept unemployment lower for longer.

The backdrop is bifurcated. Monetary policy has hurt some segments of the economy more than others. The manufacturing economy is still weak in contrast to the service economy. While the lower-end consumer has been pressured by credit costs and the higher price level, the high-end has not. The largest companies (S&P 500) are growing earnings while smaller companies (S&P 600) have not grown earnings for two years. Consequently, large company valuation (PE ratio) is well above long-term averages whereas small company valuation remains well below long-term averages.

We are mindful of what we consider the primary risks going forward: highly valued large stocks, the US election, geopolitical turmoil, and Fed execution. All can derail economic growth. Yet, in an economy with moderate growth and slowing inflation, corporate earnings and stocks can continue to do well. The cost of money is falling which adds to earnings power going forward.

Disclosures

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Index Definitions

The S&P 500 Index measures the performance of the large-cap segment of the US equity market. The S&P MidCap 400 Index measures the performance of the mid-cap segment of the US equity market. The S&P SmallCap 600 Index measures the performance of the small-cap segment of the US equity market. The Nasdaq 100 is a basket of the 100 largest, most actively traded US companies listed on the Nasdaq stock exchange. The Russell 2000 Index measures the performance of the small-cap segment of the US equity market. The MSCI World Ex USA Index captures large- and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The MSCI Emerging Markets Index captures more than 1,400 large- and mid-cap securities in 24 countries spanning across five regions. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays Investment Grade Corporates index measures the investment-grade, fixed-rate, taxable corporate bond market. The Bloomberg Barclays Corporate High Yield Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. The Bloomberg Barclays Investment Grade US Convertibles Index tracks the performance of investment-grade, USD-denominated convertible securities. S&P 500 Sectors measure segments of the US stock market as defined by GICS®. All index performance data sourced from Bloomberg.