Market Rundown Q3 2024
As we approach the final stretch of 2024, the crispness of fall sets in, leaves drift to the ground, and daylight fades a little earlier each day—definitely a shift in mood. While the cool air marks the season’s change, one reassuring constant remains: the markets continue to show resilience and growth.
Headwinds to Tailwinds
From the droughts of 2022-2023, as we entered 2024, we faced several significant headwinds: record-high inflation, interest rates at 23-year highs, challenges from globalization, and ongoing geopolitical tensions. While some of these issues persist, their effects appear to be largely behind us. Nonetheless, we remain cautious as we navigate the current landscape.
In 2024, the current economic landscape shows inflation continuing to cool and moving closer to the Fed’s 2% target, as indicated by recent CPI numbers. Interest rates seem to be entering a multi-year downward trend, prompting the Fed to think about loosening monetary policy. Just a year ago, we were expecting higher inflation, an economic slowdown, and rising interest rates, along with a more restrictive stance from the Fed. Now, however, these developments seem to present themselves as tailwinds rather than headwinds, raising an important question: How’s the economy?
Economic Growth Remains Strong
While it’s difficult to categorize the economy as purely good or bad, it has demonstrated remarkable resilience amid tight monetary policy and record-high inflation. Although the labor market remains tight, the Fed recently cut rates for the first time in four years, likely encouraging more hiring as economic pressures ease.
Consumer discretionary spending has been robust, but this trend may not last indefinitely. Consumers are feeling the weight of high interest rates and persistent inflation; however, the recent rate cuts help to alleviate some of this strain over time. While discretionary spending has begun to slow—impacting earnings for companies reliant on it—overall corporate earnings remain strong. Although economic growth may plateau through the end of the year and into the first half of 2025, growth opportunities remain high.
Stock Market Performance Remains Concentrated
The AI revolution continues to take center stage. As AI technologies are increasingly integrated into various sectors, big tech companies have significantly benefited, driving what is known as the “Mag 7” stocks—responsible for roughly 30% of the S&P 500 and a major contributor to the recent rally in U.S. equities.
While this market concentration raises some eyebrows, it is largely justified. A cycle of rising interest rates has made it difficult for small to mid-sized companies to take on more debt, which has negatively impacted their bottom lines. In contrast, the impressive earnings reported by larger firms reinforce this concentration. However, we are beginning to see a shift as investors explore opportunities in mid and small-cap companies, where cheaper debt is making expansion more feasible.
The “Mag 7” will likely continue to play a crucial role in driving stock market appreciation, but we are witnessing a broadening of equities. Dividend stocks are currently trading at attractive valuations, and international markets—especially in Europe—are showcasing a diverse array of companies like those in the U.S. Additionally, the Japanese market has outperformed many global markets, while Chinese equities are experiencing a surge, bolstered by economic stimulus—the most substantial growth since 2015. There are abundant opportunities, and while the market concentration has not raised significant concerns, prospects exist beyond the “Mag 7.”
Global Liquidity Rising
Global liquidity is rising as central banks increase the money supply within the financial system. This influx of capital can encourage investment in riskier assets such as stocks, real estate, and commodities, supporting continued gains. With higher liquidity, borrowing costs decrease, making credit more accessible and potentially fostering economic expansion. As we move into the second half of the year, global liquidity appears more favorable than in the first half, reinforcing the narrative of a soft landing for the economy.
Bonds Remain Attractive
Overall, stocks have outperformed bonds in recent years, but the current market conditions present a compelling opportunity to reconsider bonds. The past few years have been challenging for the bond market, yet we are now seeing bonds become relatively cheaper compared to stocks, creating a favorable risk-reward dynamic.
Bonds serve as an important defensive asset in the current economic cycle. Typically, when stocks underperform, bonds act as a hedge against market declines, a role that is particularly significant during a rate-cutting cycle—something the Fed has recently initiated. Given this context, the strategic position of bonds appears strong, and we see a promising opportunity as interest rates begin to fall.
While we maintain an optimistic outlook on the economy, for now, uncertainties do linger. A sharp economic slowdown or a resurgence in inflation could influence the trajectory of rate cuts. In light of these factors, we have adopted a flexible investment approach that allows for selective decision-making amid this uncertainty.
Elections Add Volatility
During election cycles, it’s common to see increased volatility due to the uncertainty surrounding potential shifts in power and policy direction. Over the past three months, the S&P 500 has remained relatively stable, but it has still experienced swings of nearly 10% in both directions since July. This reinforces the idea that political uncertainty contributes to market fluctuations.
Historically, long-term investment returns have shown little correlation with which party wins an election. Staying invested has proven to be a more successful strategy than attempting to time the market, which carries significant risks. In fact, following the last two election cycles, we witnessed market rallies of over 20% in the year after the elections.
Staying Connected
Navigating the current market environment can be challenging, but it’s crucial to remain informed and focused on our long-term investment strategy. While volatility may persist, we are confident in our ability to manage these short-term fluctuations.
We will work with you to make any necessary adjustments to your portfolio while staying aligned with our long-term strategy, adapting to market developments as needed.
Wishing you a happy fall, and we look forward to staying in touch!
Disclosure
All information in this market outlook is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index
