The Quarter In Review | 3Q 2024
RATE CUTS AND MARKETS RUN
Despite brief volatility in August, the MSCI All Country World IMI Index returned 6.8% for the third quarter, marking the index’s fourth consecutive quarter of positive returns. Non-U.S. stocks led for the period, with countries like China, India and Japan each exceeding U.S. returns. Equity and fixed income markets contemplated rate cuts at central banks, and the U.S., European Union, and UK each lowered policy rates during the quarter.
As Q3 closes and Q4 begins, many market indices are at or close to record levels. Performance of the Magnificent 7 was divided this quarter as Apple, Telsa, and Meta all were top contributors to global returns while Alphabet, Microsoft, Amazon, and NVIDIA were all among the top detractors. But the U.S. wasn’t the only country to make headlines as China announced a stimulus package in late September, which helped propel emerging markets to be the best performing market. At the sector level, financials joined REITs and utilities as the top performing sectors, while Information Technology was dragged to the bottom by names such as Microsoft, ASML and Samsung.
Globally, small caps outperformed large caps for the period, and higher profitability stocks underperformed lower profitability. REITs and utilities were the quarter’s best performing sectors, while energy and information technology were the worst. Value stocks generally outperformed growth globally, but deeper value, higher profitability stocks lagged.
FIXED INCOME
On September 18, the Federal Reserve cut the federal funds rate by 50 basis points (bps). While the economic data has not been alarmingly weak, it has been ebbing. Shortly before the rate cut, the yield curve officially exited its inverted state, ending a two-year period when short-term yields were higher than long-term yields. This is a positive development as an inverted yield curve has historically been followed by a recession.
The 10-year yield fell from a high of 4.4% before ending the quarter around 3.8%. In terms of total returns, the U.S. Aggregate Bond index rallied +5.20% for the quarter and is up +11.57% over the last year.
ALTERNATIVES
China, Europe and U.S. economic growth is slowing. Combined with a weakening U.S. dollar due to rate cuts, CORE commodity prices largely fell in the third quarter as a result. Oil and Natural Gas continued their six-month decline, returning -16.51% and -13.28% during the quarter. Overall, the Bloomberg Commodity Total Return Index was fairly flat, returning +0.68% for the third quarter of 2024.
Cuts in interest rates helped fuel a rally in U.S. Real Estate Investment Trusts (REITs), up +15.56% for the quarter and +33.71% over the last 12 months.
ECONOMY
The Atlanta Federal Reserve’s estimate of real Gross Domestic Product (GDP) growth in the third quarter is now at 3.1%. Yet the question remains how much of this growth is truly sustainable growth. In 2023, a full 30% of GDP growth was due to increased government spending (one-time outlays). For the past two years we have had a split economy with a strong service sector and a weak manufacturing sector. U.S. manufacturing activity shrank in August for a fifth straight month, reflecting faster rate declines in orders and production. The measure of production slid as well, to the lowest level since May 2020.
Total non-farm payroll employment increased by 142,000 in August, while the unemployment rate fell slightly from 4.3% to 4.2%. The number of unemployed remained at about 7.1 million. U.S. job openings fell in July from 7.91 million to 7.67 million, the lowest since the start of 2021. Layoffs did rise during the quarter, consistent with other signs of slowing demand for workers. The ratio of openings to unemployed has fallen from 2:1 in 2022 to 1.1 this month. Overall, the labor market remains fairly buoyant but softening.
From August 2023 to August 2024, the Consumer Price Index for All Urban Consumers (CPI-U) rose 2.5%, the smallest over-the-year increase since the 12 months ending March 2021. The annual core inflation rate for the 12 months ending in August was 3.2%, the same as in July.
U.S. consumer sentiment continued to rise in late September, reaching a five-month high on more optimism about the economy after the Federal Reserve’s interest-rate cut. The University of Michigan’s final September sentiment index inched up to 70.1 from the 69 preliminary reading released earlier this month
As noted above, the decline in inflation, along with the slowing labor market, provided the Fed the room it needed to lower the Fed funds rate by 50 basis points on Sept. 18. The Fed’s new Summary of Economic Projections showed policymakers see the Fed’s benchmark rate, now at 4.75%-5.0%, falling by another half of a percentage point by the end of this year, and another full percentage point in 2025. Time will tell if this holds true as prognosticators at the beginning of 2024 were predicting six rates cuts during the year, which has not come to pass.
NATIONAL DEBT
The federal government now pays over $1 trillion in interest expenses annually. A staggering one-third of the government’s tax revenue pays for the interest on the $34 trillion in cumulative debt. Keeping in mind this is before it spends a dime on the military, social welfare or the tens of thousands of other expenditures. The Congressional Budget Office warned in its latest projections that U.S. federal government debt is on a path from 97% of GDP last year to 116% by 2034—higher even than in World War II. Adding to the problem is that neither political party seems willing to address the issue.
LOOKING FORWARD
Regardless of political leanings, our investing experience has taught us that one of the biggest and most common mistakes investors make is that they focus on trying to forecast the future, which is obviously unknowable. However, that desire to forecast gets heightened in a presidential election year, in part because of the perceived impact the outcome will have on the economy and markets. Last week we sent shared insights that run counter to the talking points of partisan politics in my note titled “Election Year Impact On Your Investment Plan.” As investors, it behooves all of us to take a deep breath and understand what’s really at stake here with all the rhetoric – it’s your vote, not your investment accounts. I believe the insights shared will help ease any anxiousness about election outcomes as it relates to your investment plan.
SUMMARY
Remember, we’re here to help. This also is where the time invested upfront with each of you shows its value.
Formulating a solid and adaptable financial plan together and discussing liquidity, cash flows, and reserves provides the solid footing needed for times like these with many changing facets.
We appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss with you.
Please follow this link to read the complete Quarterly Market Review (QMR) - 3Q 2024.