October 2024
US Economy: Fed delivers.
Lower U.S. inflation and a cooling job market allowed the Federal Reserve to lower its key interest rate in mid-Sept. more than expected (by 50 basis points). Over the past four months, the Fed’s preferred inflation gauge (the Core PCE Price Index) has risen less than 1.8% annualized, while consumers’ personal income and spending have cooled (each up +0.2% in Aug.). Markets are pricing in at least two more rate cuts in 2024.
US Stocks: Rally on rate cut.
September came in like a bear and went out like a bull, with the S&P hitting a new all-time high by month’s end, cheered by lower interest rates. Consumer discretionary (+7.1%) and utilities (+6.6%) were the top-performing sectors and participation in the rally stretched far beyond the giant tech stocks (the Magnificent 7). Not all U.S. equities were fortunate, however, as small-cap stocks fell owing due to their perceived vulnerability to a weakening economy.
Foreign Stocks: China boost.
Emerging markets were the star performers in Sept. (+6.7%), driven by China’s announcement of wide-spread stimulus measures to boost its sagging economy, including slashing lending rates and the mortgage downpayment ratio. Chinese equity indexes went from all-time lows to all-time highs in a week’s time, after a 24% surge. Developed markets trailed the U.S. by 0.9% as gains in Japan and Hong Kong were not enough to offset European weakness.
Fixed Income: Interest rate twist.
U.S. bond prices rebounded on generally lower U.S. interest rates (including mortgage rates) as the Fed lowered its key rate in mid-Sept. But that was not true across the board. Rate moves varied, depending on the issuer’s creditworthiness, bond maturity and other terms. The yield on longer maturities (more than 10 years out) actually rose slightly, reflecting the potential for lower U.S. rates to spur U.S. economic growth and inflation.
Real Assets: Tailwinds in place.
While publicly traded real assets have often lagged the U.S. stock market in recent years, they have surged in recent months on three tailwinds: the outlook for lower U.S. interest rates, their higher yields and lower valuations, and the surge in electricity demand driven by AI. Annual equity returns in renewable energy (+29%), infrastructure/utilities (+29%) and REITs (+32%) have now caught up with the S&P 500.
Alternatives: Hedge funds hold.
Up against eye-popping gains in U.S. stocks and other publicly traded risk assets, hedge funds held with their own with results that in other years would receive acclaim. Year-to-date, most hedge fund categories are in the black and many have returned 5% to 10%. Hedge funds have historically been some of the best diversifiers through periods of elevated market volatility and we anticipate that will be an attractive attribute in the months ahead.
Source of data: Bloomberg
Equities Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 2.1% | 22.1% | 36.3% |
| U.S. Small Cap | 0.7% | 11.2% | 26.7% |
| U.S. Growth | 2.8% | 24.0% | 41.5% |
| U.S. Value | 1.3% | 16.2% | 27.6% |
| Int’l Developed | 0.9% | 13.0% | 24.8% |
| Emerging Markets | 6.7% | 16.9% | 26.1% |
Fixed Income Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 1.3% | 4.4% | 11.6% |
| TIPS | 1.5% | 4.9% | 9.8% |
| U.S. High Yield | 1.6% | 8.0% | 15.7% |
| Int’l Developed | 0.8% | 0.5% | 5.3% |
| Emerging Markets | 0.8% | 5.8% | 9.1% |
| Tax-Exempt | |||
| Intermediate Munis | 0.8% | 2.4% | 7.8% |
| Munis Broad Mkt | 1.1% | 2.7% | 10.5% |
Non-Traditional Assets Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 4.9% | 5.9% | 1.0% |
| REITs | 3.2% | 14.2% | 34.8% |
| Infrastructure | 3.8% | 18.0% | 30.9% |
| Hedge Funds | |||
| Absolute Return | 0.1% | 4.1% | 5.5% |
| Overall HF Market | 1.0% | 5.2% | 7.0% |
| Managed Futures | 1.4% | 2.7% | (2.6%) |
Economic Indicators
| SEPT-24 | MAR-24 | SEPT-23 | |
|---|---|---|---|
| Equity Volatility | 16.7 | 13.0 | 17.5 |
| Implied Inflation | 2.2% | 2.3% | 2.3% |
| Gold Spot $/OZ | $2634.6 | $2229.9 | $1848.6 |
| Oil ($/BBL) | $71.8 | $87.5 | $95.3 |
| U.S. Dollar Index | 121.4 | 121.0 | 122.0 |
Our Take
It’s important to take note of where we are. The S&P 500’s 21% gain so far this year (through Sept.) is the strongest three-quarter return since 1997. The average S&P 500 stock was up 9.2 % in the third quarter vs. a 5.4% return for the index, indicating that the rally had spread beyond big tech.
Historically, after the S&P 500 has gained more than 20% in the first nine months of a year, October has presented more tricks than treats. In addition to U.S. elections in November, we now have additional risks with negative implications for inflation and the U.S. economy and hence U.S. stocks: The dockworkers’ strike up and down the East Coast, if it lasts longer than several weeks; and the escalation in the war in the Middle East as Israel is now in confrontation with Iran.
Top-of-Mind
Some of the key data points we are paying attention to in the fourth quarter, which could tip the U.S. economy and markets:
U.S. job market. The majority of U.S. states — 39 total recently vs. 31 in July — have seen their unemployment rate shoot up at least 50 basis points from the cycle low. An increase in unemployment from the lows on a national scale has in the past presaged official recessions. Jobs and economic data over the next few weeks will be critical in indicating why the Federal Reserve is cutting interest rates: to help the job market now that inflation seems to be under control; or to ward off a recession.
Corporate earnings, especially in cyclical stocks. In mid-September, for example, FedEx reported a roughly 24% drop in profits for its latest quarter, driven by lower demand, and lowered its guidance for the year ahead. FedEx is typically considered a bellwether for the U.S. economy.
U.S. election results. Historically, elections have not had much of an impact on markets. But this year could be different. Both presidential candidates, if they have majorities in Congress, could pursue fiscal and trade policies that impact the federal debt, economic growth and the trajectory of inflation. Just as big of a risk is the potential for a contested election which could erode confidence in the U.S.
In our Q4 Economic Commentary, due out October 10, we delve into the upcoming election, contextualizing the various outcomes and what potential policy changes could mean for financial markets and investment portfolios.
