The U.S. stock market continued its positive momentum in the 3rd quarter, with the S&P 500 gaining 5.4%, bringing its year-to-date gain to 22.0%. This marks five consecutive months of gains and 10 out of 11 for the broad index. In fact, the S&P 500 closed the quarter at an all-time high.
Notably, during the quarter, U.S. small and medium-sized companies finally outperformed large, delivering returns of 8.9% and 8.7%, respectively, compared to the S&P 500’s 5.4%. This suggests that the rally is broadening beyond the “Magnificent 7”. However, year-to-date large-cap stocks continue their dominance over small and medium-sized companies, which are only up 11.0% and 14.5% for nine months. Meanwhile, international stocks continue to trail their U.S. counterparts, with a 13.5% return through September.
Throughout the quarter, many have found themselves questioning how the market is hitting all-time highs with at least two military wars in full force, profound economic conflict between the U.S. and China, and an exceptionally polarizing U.S. presidential election that is just a few weeks away. The answer to that question starts with this…Don’t Fight the Fed!!
In line with the Fed’s commitment to transparent communication, the September FOMC meeting resulted in interest rates being cut by 50 basis points (0.50%). While the half-point move was a bit surprising, the cut was not. The Fed has navigated the current economic situation quite well. Did we mention the markets are at all-time highs? Inflation is rolling over and the labor situation remains intact – fulfilling the Fed’s dual mandate. Unlike in past crises, such as Covid or the 2008 financial crisis, the Fed is in a position to cut rates at their own pace, rather than being forced into cutting rates.
The bond market has listened to the Fed as well over the past few months. Since May, interest rates on the 2-year Treasury have dropped approximately 150 basis points (1.5%). Remember markets are forward-looking, discounting mechanisms, and don’t usually wait for the news. In contrast, the intermediate portion of the yield curve has seen much less movement; for instance, yields on the 10-year Treasury have dropped only 75 basis points (0.75%). We expect rates at the short end of the curve to continue to drop, however, longer rates may hold steady as they are much more influenced by growth and future inflation expectations.
The employment picture in the U.S. remains solid, with an unemployment rate of 4.2%, which is still very low by historical standards. But, in August, the “Sahm Rule” (named after economist Claudia Sahm, formerly at the Federal Reserve) was violated, raising concerns about a recession. The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate rises by a half percent (0.50%) or more relative to its low during the previous 12 months. At this point, we are not deeply worried about a prolonged recession, but absolutely do acknowledge the economy is slowing. It’s worth noting that there are still over 7 million job openings in the U.S., so while unemployment has admittedly ticked up, we aren’t seeing major layoffs.
In early August, we saw the unwinding of the yen carry trade, which rocked Japanese markets in a manner worse than “Black Monday” did in 1987. This trade was put on by those speculating in currency with low interest rates (yen) and using it to invest in stocks and bonds based on a currency with higher interest rates (U.S. dollar). What happened? The Bank of Japan unexpectedly raised interest rates, causing the yen currency to strengthen and appreciate against the U.S. dollar. As a result, profits on the trades were squandered and margin calls started. When margin needs to be covered, selling brings on more selling, and we saw money being raised across many different asset classes, especially U.S. dollar-based assets.
Commodity prices remain conflicting, and honestly confounding, which is why we currently do not recommend an investment allocation. Oil prices were down more than 12% in the third quarter and are down 7% year to date. With military conflict in the Middle East, as well as Russia, how can this be? Gold, on the other hand, trades at all-time highs, up over 25% in 2024.
The upcoming U.S. presidential election dominates many conversations these days, with undoubtedly differing views from political and social perspectives. From a financial viewpoint, the most important thing to watch for is a divided government. There is solid historical data that shows the S&P 500 tends to perform best with a divided government, regardless of which party wins the presidency. This trend stems from the market’s aversion to the potential uncertainty of either party trying to get their full agenda approved without checks and balances.
In a potentially game-changing event, China announced a massive stimulus package in late September, with regulators cutting interest rates, requiring smaller mortgage down payments, and allowing banks to lend out a larger percentage of their assets. All of this is an effort to jump-start an economy that has been stagnant since even before Covid and boost the confidence among citizens as well as global investors. More noteworthy, Chinese officials sent a clear signal for future stimulus should it be necessary. At this point, we do not plan to allocate more resources to this region of the world. Instead, we’re confident that many large U.S. multinational companies will start to see the benefits, and our existing investments will provide exposure to these potential gains.
It’s hard to grumble with stock market returns in 2024, which have far exceeded our expectations. We have been solidly positioned for the market rally with significant allocations to large U.S. companies. We recommend staying the course and avoiding attempts to time the market. Moving forward, it’s important to adjust our expectations and recognize that future market returns will most likely not match those of 2023 or 2024 but should be constructive and accretive, nonetheless.
Insights
Quarterly Review: Q3 2024
The U.S. stock market continued its positive momentum in the 3rd quarter, with the S&P 500 gaining 5.4%, bringing its year-to-date gain to 22.0%. This marks five consecutive months of gains and 10 out of 11 for the broad index. In fact, the S&P 500 closed the quarter at an all-time high.
Notably, during the quarter, U.S. small and medium-sized companies finally outperformed large, delivering returns of 8.9% and 8.7%, respectively, compared to the S&P 500’s 5.4%. This suggests that the rally is broadening beyond the “Magnificent 7”. However, year-to-date large-cap stocks continue their dominance over small and medium-sized companies, which are only up 11.0% and 14.5% for nine months. Meanwhile, international stocks continue to trail their U.S. counterparts, with a 13.5% return through September.
Throughout the quarter, many have found themselves questioning how the market is hitting all-time highs with at least two military wars in full force, profound economic conflict between the U.S. and China, and an exceptionally polarizing U.S. presidential election that is just a few weeks away. The answer to that question starts with this…Don’t Fight the Fed!!
In line with the Fed’s commitment to transparent communication, the September FOMC meeting resulted in interest rates being cut by 50 basis points (0.50%). While the half-point move was a bit surprising, the cut was not. The Fed has navigated the current economic situation quite well. Did we mention the markets are at all-time highs? Inflation is rolling over and the labor situation remains intact – fulfilling the Fed’s dual mandate. Unlike in past crises, such as Covid or the 2008 financial crisis, the Fed is in a position to cut rates at their own pace, rather than being forced into cutting rates.
The bond market has listened to the Fed as well over the past few months. Since May, interest rates on the 2-year Treasury have dropped approximately 150 basis points (1.5%). Remember markets are forward-looking, discounting mechanisms, and don’t usually wait for the news. In contrast, the intermediate portion of the yield curve has seen much less movement; for instance, yields on the 10-year Treasury have dropped only 75 basis points (0.75%). We expect rates at the short end of the curve to continue to drop, however, longer rates may hold steady as they are much more influenced by growth and future inflation expectations.
The employment picture in the U.S. remains solid, with an unemployment rate of 4.2%, which is still very low by historical standards. But, in August, the “Sahm Rule” (named after economist Claudia Sahm, formerly at the Federal Reserve) was violated, raising concerns about a recession. The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate rises by a half percent (0.50%) or more relative to its low during the previous 12 months. At this point, we are not deeply worried about a prolonged recession, but absolutely do acknowledge the economy is slowing. It’s worth noting that there are still over 7 million job openings in the U.S., so while unemployment has admittedly ticked up, we aren’t seeing major layoffs.
In early August, we saw the unwinding of the yen carry trade, which rocked Japanese markets in a manner worse than “Black Monday” did in 1987. This trade was put on by those speculating in currency with low interest rates (yen) and using it to invest in stocks and bonds based on a currency with higher interest rates (U.S. dollar). What happened? The Bank of Japan unexpectedly raised interest rates, causing the yen currency to strengthen and appreciate against the U.S. dollar. As a result, profits on the trades were squandered and margin calls started. When margin needs to be covered, selling brings on more selling, and we saw money being raised across many different asset classes, especially U.S. dollar-based assets.
Commodity prices remain conflicting, and honestly confounding, which is why we currently do not recommend an investment allocation. Oil prices were down more than 12% in the third quarter and are down 7% year to date. With military conflict in the Middle East, as well as Russia, how can this be? Gold, on the other hand, trades at all-time highs, up over 25% in 2024.
The upcoming U.S. presidential election dominates many conversations these days, with undoubtedly differing views from political and social perspectives. From a financial viewpoint, the most important thing to watch for is a divided government. There is solid historical data that shows the S&P 500 tends to perform best with a divided government, regardless of which party wins the presidency. This trend stems from the market’s aversion to the potential uncertainty of either party trying to get their full agenda approved without checks and balances.
In a potentially game-changing event, China announced a massive stimulus package in late September, with regulators cutting interest rates, requiring smaller mortgage down payments, and allowing banks to lend out a larger percentage of their assets. All of this is an effort to jump-start an economy that has been stagnant since even before Covid and boost the confidence among citizens as well as global investors. More noteworthy, Chinese officials sent a clear signal for future stimulus should it be necessary. At this point, we do not plan to allocate more resources to this region of the world. Instead, we’re confident that many large U.S. multinational companies will start to see the benefits, and our existing investments will provide exposure to these potential gains.
It’s hard to grumble with stock market returns in 2024, which have far exceeded our expectations. We have been solidly positioned for the market rally with significant allocations to large U.S. companies. We recommend staying the course and avoiding attempts to time the market. Moving forward, it’s important to adjust our expectations and recognize that future market returns will most likely not match those of 2023 or 2024 but should be constructive and accretive, nonetheless.