Happy Fall! US equity markets advanced to new highs in the third quarter of 2024, primarily driven by the Federal Reserve’s initiation of long-awaited interest rate cuts, as well as sector rotation across various industries. The S&P 500 posted a 5.9% gain, while the Dow Jones Industrial Average rose by 8.7%. The Nasdaq Composite, driven by technology stocks, managed a more modest gain of 2.8%, as investors shifted focus toward value stocks and smaller caps. International markets also saw a positive quarter, with the MSCI ACWI ex-US Index increasing by 8.1%, reflecting strength in both developed and emerging markets. In the fixed income sector, the Bloomberg Aggregate Bond Index rebounded strongly, up 5.2% for the quarter, as declining inflation and the Fed’s easing of monetary policy boosted bond prices.
Investors were optimistic as monetary policy shifted. Unlike previous years, rising bond yields and inflation concerns were present but did not weigh heavily on the market’s performance during the quarter. Instead, the markets maintained momentum through a supportive economic backdrop and anticipation of future earnings growth.
The sector performance across US equity benchmarks was very positive, marked by broader market participation and less reliance on the “Magnificent 7” tech giants. Utilities led with a 19.4% increase, benefiting from falling interest rates, which enhanced their attractiveness due to high dividend yields. The Healthcare sector also posted a solid 6.1% gain, supported by consistent demand for healthcare services and robust earnings from pharmaceutical and medical device companies. While Technology experienced a modest 1.6% gain, it remains one of the top-performing sectors year-to-date, along with Utilities.
Broader market participation and the shift away from reliance on the “Magnificent 7” is a positive sign. This diversification is crucial for reducing risk, as it makes the market less vulnerable to downturns in any single sector. It also indicates a more balanced and sustainable market, providing investors with greater opportunity across a wider range of industries.
Despite ongoing challenges, the Fed’s rate cut, strong corporate earnings, and resilient consumer spending helped the market reach new highs. Job growth remained solid throughout the quarter, contributing to a stable labor market. The US economy added 254,000 jobs in September, which was higher than the average monthly gain of 203,000 over the prior 12 months.
The continued resilience of the labor market indicated that the economy remained robust, despite the Fed’s aggressive tightening earlier in this cycle. This gave the Fed more confidence to implement a rate cut in September. This is the first rate cut since 2020, reducing the Federal Funds rate by 50 basis points. This decision was widely anticipated, and markets reacted positively, with gains accelerating towards the end of the quarter. While there is speculation about additional rate cuts, the Fed has signaled that any future reductions will be carefully measured and dependent on continued progress in inflation reduction. We believe that further cuts will likely be gradual, with market participants adjusting their expectations accordingly. The Fed’s dual mandate of managing inflation and supporting maximum employment continues to guide its policy decisions.
The bond market’s reaction to the Fed’s rate cut was generally positive, with long-term yields stabilizing as investors anticipated continued easing of monetary policy. Rate-sensitive sectors, such as real estate and utilities, outperformed in Q3, buoyed by lower borrowing costs and strong investor demand for income-generating assets. While some volatility remains in the bond market, driven by mixed signals regarding future rate movements, the overall outlook has improved significantly.
The September interest rate cut, like many before it, helped fuel gains, as rate cuts typically provide a boost to the market in the period that follows. If we look at the last 10 Federal Reserve rate cuts since 1981, 7 out of 10 resulted in positive stock market performance for the S&P 500 over both the 6-month and 1-year periods after. The three instances where the market posted negative returns following the cut—during the 1981-1982 recession, the dot-com bubble burst in 2001, and the housing market collapse in 2007—were rare economic events that led to severe financial downturns. These periods were marked by deep recessions, and rate cuts alone were not sufficient to immediately stabilize the market. On average, the 6-month S&P 500 return following a rate cut has been 4.9%, while the 1-year return averaged 6.2%, when including these times of recession. When not including these outlier periods, the market averaged a gain of 11.7% over 6 months, and 17.4% over 1 year. This demonstrates that in more typical economic slowdowns, rather than a deep recession, rate cuts tend to significantly boost stock market returns over time.
The ongoing conflict between Israel and its neighboring regions could have implications for global markets, particularly in sectors like energy, defense, and commodities. Historically, geopolitical tensions in the Middle East have led to spikes in oil prices due to fears of supply disruptions, which can affect both inflation and consumer spending. Rising energy costs can lead to higher transportation and production expenses for businesses, which in turn may pass onto consumers, ultimately challenging the Fed’s goal of controlling inflation. In addition, the upcoming election may contribute to short-term market volatility, but historical data suggests that equity markets tend to stabilize after the election, regardless of which party takes office. As we move forward, staying agile in response to shifts in economic indicators and central bank policies will be vital.
Looking ahead, our outlook for the fourth quarter remains cautiously optimistic. While underlying economic data shows resilience, it is crucial for investors to maintain a balanced approach. We continue to focus on high-quality asset allocations, as the market continues to navigate uncertainty. Value stocks, in particular, seem well-positioned for growth as economic strength exceeds prior expectations. Additionally, portfolio diversification remains a cornerstone of risk management, especially in the face of potential volatility. We will be keeping a close eye on key catalysts, particularly the Fed’s approach to interest rates, and conflicts abroad.
We remain committed to helping you navigate these evolving markets, ensuring your portfolio is aligned with emerging opportunities. Whether you are seeking advice, considering a strategy shift, or simply reviewing your current financial goals, our team is here to offer tailored insights to meet your unique needs. As always, we value your trust and partnership, and we remain fully dedicated to supporting you through every phase of your financial journey. Please reach out with any questions or to schedule a portfolio review.
Joseph P. Biondo
CIO, CEO and Portfolio Manager
Sources: Index and sector returns – Bloomberg, Nasdaq; Market outlook – Nasdaq, Winthrop Wealth; Federal Reserve and economic data – JP Morgan, US Bureau of Labor Statistics; Rate cut statistics – PinPoint Macro Analytics
The information set forth regarding investments was obtained from sources that we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance does not guarantee future results.
Third Quarter 2024 Market Commentary
Joseph P. Biondo
Happy Fall! US equity markets advanced to new highs in the third quarter of 2024, primarily driven by the Federal Reserve’s initiation of long-awaited interest rate cuts, as well as sector rotation across various industries. The S&P 500 posted a 5.9% gain, while the Dow Jones Industrial Average rose by 8.7%. The Nasdaq Composite, driven by technology stocks, managed a more modest gain of 2.8%, as investors shifted focus toward value stocks and smaller caps. International markets also saw a positive quarter, with the MSCI ACWI ex-US Index increasing by 8.1%, reflecting strength in both developed and emerging markets. In the fixed income sector, the Bloomberg Aggregate Bond Index rebounded strongly, up 5.2% for the quarter, as declining inflation and the Fed’s easing of monetary policy boosted bond prices.
Investors were optimistic as monetary policy shifted. Unlike previous years, rising bond yields and inflation concerns were present but did not weigh heavily on the market’s performance during the quarter. Instead, the markets maintained momentum through a supportive economic backdrop and anticipation of future earnings growth.
The sector performance across US equity benchmarks was very positive, marked by broader market participation and less reliance on the “Magnificent 7” tech giants. Utilities led with a 19.4% increase, benefiting from falling interest rates, which enhanced their attractiveness due to high dividend yields. The Healthcare sector also posted a solid 6.1% gain, supported by consistent demand for healthcare services and robust earnings from pharmaceutical and medical device companies. While Technology experienced a modest 1.6% gain, it remains one of the top-performing sectors year-to-date, along with Utilities.
Broader market participation and the shift away from reliance on the “Magnificent 7” is a positive sign. This diversification is crucial for reducing risk, as it makes the market less vulnerable to downturns in any single sector. It also indicates a more balanced and sustainable market, providing investors with greater opportunity across a wider range of industries.
The continued resilience of the labor market indicated that the economy remained robust, despite the Fed’s aggressive tightening earlier in this cycle. This gave the Fed more confidence to implement a rate cut in September. This is the first rate cut since 2020, reducing the Federal Funds rate by 50 basis points. This decision was widely anticipated, and markets reacted positively, with gains accelerating towards the end of the quarter. While there is speculation about additional rate cuts, the Fed has signaled that any future reductions will be carefully measured and dependent on continued progress in inflation reduction. We believe that further cuts will likely be gradual, with market participants adjusting their expectations accordingly. The Fed’s dual mandate of managing inflation and supporting maximum employment continues to guide its policy decisions.
The bond market’s reaction to the Fed’s rate cut was generally positive, with long-term yields stabilizing as investors anticipated continued easing of monetary policy. Rate-sensitive sectors, such as real estate and utilities, outperformed in Q3, buoyed by lower borrowing costs and strong investor demand for income-generating assets. While some volatility remains in the bond market, driven by mixed signals regarding future rate movements, the overall outlook has improved significantly.
The ongoing conflict between Israel and its neighboring regions could have implications for global markets, particularly in sectors like energy, defense, and commodities. Historically, geopolitical tensions in the Middle East have led to spikes in oil prices due to fears of supply disruptions, which can affect both inflation and consumer spending. Rising energy costs can lead to higher transportation and production expenses for businesses, which in turn may pass onto consumers, ultimately challenging the Fed’s goal of controlling inflation. In addition, the upcoming election may contribute to short-term market volatility, but historical data suggests that equity markets tend to stabilize after the election, regardless of which party takes office. As we move forward, staying agile in response to shifts in economic indicators and central bank policies will be vital.
Looking ahead, our outlook for the fourth quarter remains cautiously optimistic. While underlying economic data shows resilience, it is crucial for investors to maintain a balanced approach. We continue to focus on high-quality asset allocations, as the market continues to navigate uncertainty. Value stocks, in particular, seem well-positioned for growth as economic strength exceeds prior expectations. Additionally, portfolio diversification remains a cornerstone of risk management, especially in the face of potential volatility. We will be keeping a close eye on key catalysts, particularly the Fed’s approach to interest rates, and conflicts abroad.
We remain committed to helping you navigate these evolving markets, ensuring your portfolio is aligned with emerging opportunities. Whether you are seeking advice, considering a strategy shift, or simply reviewing your current financial goals, our team is here to offer tailored insights to meet your unique needs. As always, we value your trust and partnership, and we remain fully dedicated to supporting you through every phase of your financial journey. Please reach out with any questions or to schedule a portfolio review.
Joseph P. Biondo
CIO, CEO and Portfolio Manager
Sources: Index and sector returns – Bloomberg, Nasdaq; Market outlook – Nasdaq, Winthrop Wealth; Federal Reserve and economic data – JP Morgan, US Bureau of Labor Statistics; Rate cut statistics – PinPoint Macro Analytics
The information set forth regarding investments was obtained from sources that we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance does not guarantee future results.