After a relatively calm first half of the year in capital markets, investors experienced increased volatility in the third quarter of 2024 due to a combination of geopolitical events and a hawkish Federal Reserve. The S&P 500 experienced a correction of almost 10% in July and another decline of 5% to start September. However, both market pullbacks were relatively short, and the S&P 500 rose for the fourth consecutive month finishing the quarter near its record high.

Q3 Equity and Fixed Income Markets

Investors saw positive returns in almost all Equity and Fixed Income asset classes in the third quarter. Despite multiple bouts of volatility, U.S. Equity markets advanced over 6%, with Value and Dividend oriented equities outperforming Growth stocks. And despite ongoing geopolitical tensions, Developed International and Emerging Market equities were up over 8%, outperforming U.S. stocks this quarter and providing solid returns over the past year.

On the fixed income side, bond returns were up over 5%. Longer term bond investors are benefiting from the combination of relatively high interest rates being paid and the Federal Reserve beginning their rate cutting cycle. In mid-September the Federal Reserve reduced the Federal Funds Rate by a larger than expected 0.50% and set the expectation that more interest rates cuts will occur in the coming months and into 2025.

Quarterly Market Performance

Source: Morningstar Direct. Data as of Sep. 30, 2024. Performance in %

Has the Fed Finally Tamed Inflation?

Capital market participants have been watching both the rate of inflation and the Federal Reserve and wondering who would blink first. The expectation at the beginning of the year was that we would see five or six rate cuts in 2024, potentially beginning as early as March. Those expectations proved wrong with the Federal Reserve staring down inflation until just last month, after the Consumer Price Index declined for 3 consecutive months, ending August at 2.5%. The tamer inflation readings finally allowed the Fed to reduce rates for the first time since March of 2020, reflecting a renewed focus on keeping employment at stable levels as inflation continues down to its 2% target.

Source: U.S. Bureau of Labor Statistics | Note: Shaded area represents recessions as determined by the National Bureau of Economic Research

Q4 2024 Outlook      

As we move into Q4, investors should expect more turbulence in the capital markets as political and geopolitical events dominate the headlines. The Russia-Ukraine conflict continues to drive uncertainty in Europe through energy supply disruptions and economic sanctions against Russia. At the same time, expanding tensions in the Middle East have the potential to create continued disruptions to trade routes and further volatility in oil prices. Closer to home, the U.S. elections and their potential impact to policies related to trade, taxes and regulation could cause volatility in the coming months as investors adjust to the outcome.

The positive news is that diversified portfolios have been exceptionally resilient over the past year despite increasing global tension and for good reason. While unemployment has risen modestly, the percentage of prime workers between the ages of 18-64 has grown beyond pre-pandemic levels _¹, which is leading to sustained consumer spending. Additionally, corporate profits remain near all-time highs as a percentage of GDP _², giving them the ability to hire or invest in operations once the political landscape becomes more certain. Finally, the Federal Reserve believes it has inflation on a sustainable path to 2% and is signaling more rate cuts in the coming months, which can be supportive of continued economic growth in Q4 and into 2025.

As we move into the final quarter of this year, we will continue to monitor portfolio performance and provide timely market updates as needed. In the meantime, don’t hesitate to reach out to us with questions.

1 JP Morgan, Q3 2024 Guide to the Markets, slide 27

2 Apollo Group, Daily and Weekly indicators for the U.S. economy, page 23