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The Quick Facts
- The S&P 500 continues to hit record highs, finishing September up 2.1%, the quarter up 5.9%, and bringing the YTD positive return to 22.1%.
- Soft landing hopes, encouraging inflation data, and a higher-than-expected 50 basis points Federal Reserve (Fed) rate cut broadens the U.S. equity rally in 3Q24.
- The 2-year and 10-year Treasury yield curve is no longer inverted, the result of a “bull steepening,” or when the decline in yields is more pronounced for shorter-term bonds than longer-term bonds.
- The presidential election is too close to call; people care about elections, markets do not.
- The CBOE Volatility Index (VIX) remains in a higher 15/22 range than in the first half of 2024, given Fed funds and election uncertainty going into 4Q24.
With optimism about a soft landing, encouraging inflation data, and a higher-than-expected 50 basis points Fed rate cut, U.S. markets experienced a broadening of the rally in 3Q24.
The S&P 500 continued to hit record highs, finishing September up 2.1%, the quarter up 5.9%, and bringing the YTD positive return to 22.1%. Both the EAFE (Europe, Australasia, and the Far East) and the EM (Emerging Markets) equity indices outperformed the S&P 500 in 3Q24 with 7.4% and 8.7% returns, respectively, confirming the broadening of the rally.
The Fed lowered its benchmark interest rate by 50 basis points on September 18, an aggressive start to a policy shift aimed at bolstering the labor market. It was the Fed’s first rate cut in more than four years. “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%,” Fed Chair Jerome Powell said at the press conference following the rate cut announcement. Powell added the Fed “might well have” begun cutting interest rates in July if it had received the jobs report before the meeting. However, other macro data point to continued strength in the economy.
September Asset Class Performance
Consumer Discretionary (+7.3%) and Utilities (+6.6%) led among sectors in September, while Energy (-3.0%) and Health Care (-1.7%) were the laggards. Except for Energy down 2.9% and Information Technology flat, all sectors posted gains in 3Q, with Utilities, Real Estate, and Industrials in the lead, up 19.3%, 17.1%, and 11.5%, respectively. Year-to-date, the top three performing sectors are Utilities (+30.5%), Communication Services (+25.5%), and Financials (+21.9%), while the worst three are Energy (+7.3%), Consumer Discretionary (+12.8%), and Materials (+14.1%).
Growth outperformed Value, with the Russell 1000 Growth up 2.8% in September (+24.5% YTD) vs. +1.4% for the Russell 1000 Value (+16.7% YTD). Over the last three years, the total return of the Large-Cap Value index has lagged the total return of the Large-Cap Growth Index by 11.1%. The Russell 2000 Index – the world’s most closely followed gauge of smaller companies – was up 0.7% in September, bringing the YTD return to +11.2%. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 2.1% in September, in line with the S&P 500. Over the last three years, the ESG index is up 26.3% and 8.5% behind the S&P 500 on a total return basis. EM equities outperformed in September, with a +6.7% total return. A confluence of monetary easing, regulatory adjustments, and fiscal stimulus orchestrated by Beijing unleashed a flood of capital in the Chinese stock market, which accounts for ~28% of the index. EM continues to lag U.S. equity returns year-to-date (+16.9%), over the last 12 months (+26.1%), and over the last three years (+1.2%). The EAFE equity index underperformed in September with a +1.0% return. The index is now up 13.6% YTD, behind the U.S. and EM returns for equities.
Is the market getting ahead of itself with Fed easing expectations? BlackRock CEO Larry Fink believes the market is pricing too many interest-rate cuts from the Fed given the U.S. economy continues to grow, and we tend to agree. “I don’t see any landing,” Fink told Bloomberg. “The amount of easing that’s in the forward curve is crazy. I do believe there’s room for easing more, but not as much as the forward curve would indicate.” The forward curve is now pricing more than a two-third chance of three 25 basis point cuts by year-end, and more than a 50% chance of seven or more cuts by June 2025. The Fed’s current benchmark rate is regarded as restricting economic activity. A neutral monetary policy is one that neither stimulates nor holds back the economy. How much lower is r-star (the real neutral rate) is yet to be determined.
Treasuries extended gains in September. The 10-year U.S. Treasury closed September at 3.78% vs. 4.40% at the end of June, 3.88% at the end of December 2023, and from a peak of 5.0% in October 2023. Shorter-term 2-year U.S. Treasury closed 28 basis points lower on the month at 3.64% vs. 4.25% at the end of 2023. The 2-year and 10-year Treasury yield curve is no longer inverted, as the 10-year yield is now 14 basis points higher than the 2-year yield. This is the result of a “bull steepening,” which is when the decline in yields is more pronounced for shorter-term bonds than longer-term bonds. The U.S. Aggregate bond index was up 1.3% in September, bringing the YTD return to 4.4%. The Municipal Bond Index was up 1.0% in September and is up 2.3% YTD. U.S. Corporate Investment Grade and U.S. High Yield are up 5.3% and 8.0% YTD, respectively.
The presidential race between Kamala Harris and Donald Trump remains too close to call, with polls showing no clear frontrunner. While elections may create short-term fluctuations, it is essential to maintain a long-term perspective. People care about elections, markets do not. Reacting impulsively to market fluctuations can lock in losses and derail investment strategy.
The VIX saw the worst volatility surge since the pandemic at the beginning of August, trading as high as 65.7. It has come down significantly since but remains in a higher 15/22 range than in the first half of 2024. The VIX closed September at 16.7, compared to the post-GFC average of 18.5. The Gold bull run is in full steam with another +5.2% in September, closing at $2,635 per ounce and up +27.7% YTD, ahead of U.S. Large-Cap equities. Oil futures, as measured by the WTI Crude Oil $/bbl., were down 7.3% in September to $68/bbl. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, weakened by another 0.9% in September, 4.8% in 3Q, and is now down 0.5% YTD. Both Bitcoin and Ethereum were up in September (+8.2% and +4.3%, respectively) and up 50.1% and 14.5% YTD, respectively.
Chart of the Month – The Sahm Rule
The Sahm Rule is an economic indicator used to identify the onset of a recession. Named after economist Claudia Sahm, it signals a recession when the three-month moving average of the national unemployment rate rises by at least 0.5 percentage points above its lowest point in the previous 12 months. This rule is particularly useful because it relies on real-time data from the Bureau of Labor Statistics (BLS), making it a timely and reliable measure for detecting economic downturns. The Sahm Rule helps policymakers respond quickly to economic slowdowns by triggering automatic monetary and fiscal policies.
Historically, the Sahm Rule has been a reliable indicator, as it has never been triggered outside of a recession since its introduction. This track record adds to its credibility compared to some other indicators that might give false signals. Other recession indicators, like the yield curve inversion (difference between long-term and short-term interest rates) or the Leading Economic Index (LEI), a composite of multiple economic variables, involve more complex data and can sometimes give mixed signals.
That said, the Sahm Rule may have been broken this time. The rise in the unemployment rate in July to 4.3%, announced on August 2, brought the Sahm Rule to 0.57, above its trigger point, before the September labor market report (released on October 4) pushed the indicator back down to 0.50. Economist Claudia Sahm, who created the rule in 2019, believes that “there is good reason to view the current rise in the unemployment rate as overstating the recessionary dynamics.” She also noted in an opinion piece published in August that “the risk of a recession is elevated, strengthening the case for the U.S. Federal Reserve to cut interest rates.”
Quote of the Month
“The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.” – Milton Friedman
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RELATED LINKS
Beacon ‘Pointe of View’ – A Market Update September 2024
Beacon ‘Pointe of View’ – A Market Update August 2024
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