September 2024
US Economy: Cool enough for rate cuts.
Q2 data including GDP growth (+3.0%) saw modestly positive revisions, but economic indicators continued to slip with notable weakness in manufacturing and job growth. On the latter, U.S. jobs openings are at the lowest level since January 2021 and job creation figures for the past three months were revised downward. A Fed rate cut mid-Sept. is a near certainty, with the remaining question: By how much?
US Stocks: Large stocks persevere.
Large-cap stocks were again buoyed in August by better-than-expected corporate earnings, the promise of AI, and the Fed rate cut pending in September, helping to offset weaker economic data and the fallout from an interest rate increase in Japan. Small-cap stocks were not so lucky given their perceived sensitivity to an economic downturn. In early Sept., a pickup in broad market volatility indicated the potential for a not-so-soft landing.
Foreign Stocks: Europe strong.
European equities were among the strongest performers in August with the U.K., France and Switzerland all returning approximately 4% for the month. Similar to the U.S., the Eurozone is anticipating interest rate cuts, with a surprise drop in inflation in August underscoring that probability. Emerging markets were pulled down by weakness in South Korea (-3%), stemming largely from Samsung (-9%) due to weakening demand for mobile devices.
Fixed Income: Bonds rally.
With the yield on 10-year U.S. Treasuries below 3.8% as of early Sept., investors are trying to lock in longer-term yields ahead of interest rate cuts and driving up bond prices (gains in the mid-single digits over the past 12 months). Higher yielding corporate bonds continued to perform well (+1.6% in Aug.) on expectations for lower financing costs. Municipal bonds, which are typically less impacted by interest rates, lagged modestly.
Real Assets: Domestic Boost.
Real assets, except for commodities, were strong performers in August. REITs (+6%) and infrastructure (+5%) benefitted from relatively attractive valuations, and in the latter case more defensive characteristics and the tailwinds of fiscal stimulus. The U.S. has seen a surge in capital goods imports (+15% in the past year) due to tailwinds from the CHIPS Act and the Infrastructure Act, which incentivize businesses to invest in domestic production capacity.
Alternatives: Ready to rebound.
Private equity (PE) had one of its most active quarters in the last two years, with 122 deals announced valued at $196 billion, double the Q1 numbers according to Ernst and Young. PE activity has been limited over the last few years as elevated interest rates disrupted markets and widened the gap between private equity sellers and buyers. Private equity sponsors are increasingly optimistic that investment activity will increase in the year ahead.
Source of data: Bloomberg
Equities Total Return
| AUG | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 2.4% | 20.2% | 27.1% |
| U.S. Small Cap | (1.5%) | 11.2% | 18.4% |
| U.S. Growth | 1.9% | 22.4% | 30.1% |
| U.S. Value | 2.4% | 14.3% | 21.0% |
| Int’l Developed | 3.3% | 11.9% | 19.4% |
| Emerging Markets | 1.6% | 9.4% | 15.1% |
Fixed Income Total Return
| AUG | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 1.4% | 3.6% | 7.3% |
| TIPS | 0.8% | 3.6% | 6.2% |
| U.S. High Yield | 1.6% | 6.3% | 12.5% |
| Int’l Developed | 0.7% | (0.3%) | 2.7% |
| Emerging Markets | 0.7% | 4.9% | 7.4% |
| Tax-Exempt | |||
| Intermediate Munis | 1.2% | 1.6% | 5.1% |
| Munis Broad Mkt | 0.8% | 1.6% | 6.2% |
Non-Traditional Assets Total Return
| AUG | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 0.0% | 1.5% | (4.4%) |
| REITs | 6.2% | 8.8% | 18.2% |
| Infrastructure | 4.6% | 13.7% | 20.2% |
| Hedge Funds | |||
| Absolute Return | 0.5% | 4.0% | 6.2% |
| Overall HF Market | 0.4% | 4.1% | 5.8% |
| Managed Futures | (2.8%) | 1.3% | (1.1%) |
Economic Indicators
| AUG-24 | FEB-24 | AUG-23 | |
|---|---|---|---|
| Equity Volatility | 15.0 | 13.4 | 13.6 |
| Implied Inflation | 2.2% | 2.3% | 2.2% |
| Gold Spot $/OZ | $2503.4 | $2044.3 | $1940.2 |
| Oil ($/BBL) | $78.8 | $83.6 | $86.9 |
| U.S. Dollar Index | 122.6 | 121.4 | 120.2 |
Our Take
With summer ending, so has the relatively benign environment that has characterized 2024. Substantial market volatility surfaced in early August and then again in early September. There are a handful of factors driving the markets as we head into fall, potentially creating a more volatile environment. Some of the key items we are paying attention to that could tip the U.S. economy and markets:
- U.S. labor market. Investors seem focused on the next individual data point and missing the bigger picture where the trend is clear: The labor market has weakened below pre-Covid levels.
- Fed rate decision. The Fed decision to cut interest rates has been granted near certainty status in the derivatives markets. Will the Fed make 1 cut or a more aggressive gesture of 2 or more? Markets are torn with expectations for 1.5. The Fed’s decision and characterization of the shift in policy will be a likely inflection point for markets.
- AI outlook. The U.S. equity market’s 2024 performance has been driven by AI-related companies. While markets could more broadly benefit from AI-driven productivity and earnings, recent performance has highlighted that any reversal in fortunes—such as less impressive revenue and earnings results—could impact the broader market. The Magnificent 7 have underperformed the S&P 500 by more than 4.5% in the last two months.
- U.S. election. As we get closer to November 5, markets appear to be pricing in the consequences of U.S. Presidential and Congressional elections, including the potential for new fiscal, trade and immigration policies as well as a contested election. Either administration may pursue policies that can affect economic growth prospects and the trajectory of inflation.
- The unknown unknowns. An unexpected shock to the system is always possible but it is perceived as more likely during periods of higher uncertainty, where we find ourselves today. The state of homeostasis that we’ve all become used to can quickly evaporate as an exogenous shock changes stability to instability.
Panning back, portfolios have gained in 2024 from strong returns in most asset classes although U.S. equities have been the greatest benefactors. With such performance it is easy to be complacent and lose sight of long-term portfolio objectives. One of our key duties is to evaluate portfolio risk in light of those long-term objectives, even when it is tempting to “let it ride.”
On a risk-adjusted basis, the assets that appear most attractive to us are those that help diversify the equity component of our portfolios. Over the last two months, core bonds have quietly outperformed large-cap stocks rewarding that conviction. While every client situation is different, in broad strokes our areas of focus have been to trim equity exposures that may be at or near strategic targets, topping-up bond exposures as bonds are likely to benefit if economic conditions and market sentiment deteriorate, and adding to Diversifiers (hedge funds, private credit) to address a pickup in volatility.
