Q3 2024 Market Commentary + Outlook

Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, discuss Q3 market performance and what to anticipate during the national election and for the remainder of 2024.

The S&P 500 grew 5.9% during the third quarter of 2024, with 10 of the 11 underlying sectors gaining. Utilities and real estate were the top performers thanks to falling interest rates. Inflation data and the labor market cooled throughout the quarter and the Federal Reserve (Fed) cut interest rates by 50 bps. International markets outpaced their domestic counterparts in Q3, with the MSCI EAFE rising 7.3%, propelled by the falling US dollar. The European Central Bank (ECB) cut interest rates for the second time this year as inflation moderated in the eurozone, and Japan was briefly plagued by the rapid unwinding of the yen carry trade but largely recovered after. Emerging markets, as measured by the MSCI Emerging Markets Index, gained 8.7% on the quarter as the People’s Bank of China (PBOC) further cut its reserve requirement, unleased a stimulus package, and vowed to remedy the property market slump. Fixed income was strong in Q3, with the Bloomberg US Universal Index increasing 5.2% as the Fed kicked off its rate-cutting campaign. The US economy continued to expand, and inflation moderated as markets turned their attention to the labor market.

The S&P 500 increased 5.9% during the third quarter of 2024, rising at a steady clip each month. The quarter started off a bit rocky, with consumer optimism about the economy falling to an 8-month low over lingering inflation frustration. A key barometer of factories was negative throughout the three months, signaling the manufacturing sector slipped deeper into contraction. In the first part of Q3, service sector activity was weak, but by the end of September, data came in stronger-than-expected. Within the labor market, data released throughout the quarter showed the weakest jobs growth since January 2021. Inflation cooled throughout the quarter, with both the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE), two of the Fed’s favorite inflation indicators, posting the lowest readings since February 2021. As the Fed became more confident of inflation’s taming, the central bank began the rate cutting cycle, slashing interest rates by 50 bps in September. Dovish comments by Fed members prompted markets to price in additional 75 bps of cuts this year, citing inflation is heading in the right direction but the central bank must support employment as well.

All but one of the 11 underlying sectors in the S&P 500 rose in Q3. The Utilities sector was the top performer, gaining 19.4% on the heels of easing interest rates and investors shifting toward defensive sectors amid economic uncertainty. Real estate was close behind, rising 17.2% as lower interest rates boosted property values. Conversely, energy was the only sector to fall on the quarter, losing 2.3% amid declining oil and gas prices.

In a reversal of the past years’ trends, small cap stocks outpaced large cap stocks in Q3 thanks to decreased borrowing costs. Further, value stocks bested growth stocks as value stocks tend to perform well during periods of falling interest rates.

Due to the falling value of the dollar, international developed markets outpaced their domestic counterparts in Q3, with the MSCI EAFE Index gaining 7.3% on the quarter (compared to 0.8% in local currency terms). Within the eurozone, retail sales and business activity shrank throughout the quarter. Additionally, inflation continued to trend downward and wage growth slowed. These data prompted the ECB to cut interest rates in September (for the second time this year), improving investor sentiment amid easing inflation and borrowing costs. In the UK, the job market remained strong as average earnings grew and the housing market sentiment strengthened thanks to lower interest rates. Inflation remained steady throughout the quarter, but consumer demand declined. In Japan, the stock market experienced the most severe one-day selloff in decades due to the rapid unwinding of the yen carry trade (borrowing yen at Japan’s ultralow interest rates to invest in a higher-yielding foreign market). Markets recouped much of the lost ground during the quarter however, as the Bank of Japan pledged not to raise interest rates during instability.

Elsewhere, the MSCI Emerging Markets Index rose 8.7% on the quarter, with most of the gain coming in September. China (the largest constituent of the index) continued its downfall throughout much of the quarter before a sharp rebound at the end of September. In July and August, the property sector downturn persisted, with new home prices falling for the 13th consecutive month. Retail sales were weak, deflationary concerns persisted, and the PBOC failed to instill consumer confidence in the ailing economy. Finally, the PBOC cut its reserve requirement for the second time this year as part of a sweeping stimulus package. Chinese leaders vowed to stabilize the property market, cutting the rate of existing home mortgages, and slashing the down payment ratio for second home purchases. Revitalized by the government action and monetary easing, Chinese stocks notched their best days since 2008 and gained 23.9% in one month alone. Alternatively, South Korea was the worst performing country of the quarter, falling amid tech sector weakness and concerns about tighter US restrictions on exporters of semiconductors and microchips.

Over the third quarter, both the Bloomberg US Aggregate Index and the broader Bloomberg US Universal Index gained 5.2% as the Fed cut interest rates and markets priced in an additional 75 basis points of cuts this year.

The yield on the 10-year US treasury fell 0.67% during the quarter, ending at 3.81%. Short duration yields, which are closely tied to Fed rate moves, declined as well. The 2-year treasury fell 1.11% and dropped below the 10-year yield, ending the yield curve inversion after more than two-and-a-half years. Inverted yield curves tend to indicate recessions, but it seems the Fed may have navigated a soft-landing. Therefore, credit sectors, including high yield and emerging market debt, performed well as default fears faded and credit spreads narrowed.

US gross domestic product (GDP) grew at an annualized rate of 3.0% over the second quarter of 2024, the latest period for which data are available. The US economy expanded faster than anticipated in Q2, as consumer spending remained strong despite high interest rates and restrictive monetary policy. Additionally, preliminary data published throughout Q3 showed the economy continuously growing at a steady clip.

Throughout the third quarter of 2024, the once-resilient labor market began to turnover. Revised data showed unemployment claims rose, and the US added fewer jobs than previously reported. In fact, August marked the weakest job growth since January 2021. Despite the lower inventory of jobs, wage growth remained positive, helping to sustain consumer spending. With inflation seemingly under control, the Fed is expected to pay close attention to the labor market, focusing on its mandate to maintain full employment (which occurs when all who are able and willing to work are employed).

The Fed may have finally tamed the beast of inflation in Q3. The high interest rates experienced since 2022 made it more difficult for businesses and individuals to borrow, leading to slower growth. Data published revealed that inflation declined for the first time in over four years during the quarter. In August, two of the Fed’s most-watched indicators of inflation, PCE and CPI, both posted the lowest readings since February 2021. One of the major contributors to the cooling was shelter costs beginning to moderate, which had been one of the most significant drivers of inflation over the past quarters. Consumers also began to feel reprieve from the skyrocketing prices of goods and services, with gas hitting a six-month low in September. While the Fed will continue to keep a close watch, many believe the central bank navigated its fight against inflation without triggering a recession.

Arguably, the Fed may have been able to thread the needle between lowering inflation and maintaining economic stability. Coming off the highest interest rates in nearly 20 years, the US economy has continued to expand in 2024. Looking ahead, US stocks are poised for growth, pending falling inflation, and a soft landing. The Fed continuing to reduce borrowing costs by cutting interest rates in 2024 and beyond should benefit small cap stocks the most (which are trading at attractive valuations). Historically, falling interest rates have been more beneficial to value stocks over growth, which was the case in the third quarter. This trend could continue if the Fed maintains an easing policy, which is expected.

Developed international stocks are attractively priced and have begun to recover thanks largely to the US dollar weakness. Developed market stocks are trading at the largest discounts to US stocks in over 20 years and growth in Europe and Japan is projected to increase sharply relative to the US in 2025. As inflation moderates in Europe, the ECB is poised to cut interest rates further this year. Emerging market stocks have started to recover after a slow start to 2024. Strong economic growth is projected, and investors have begun to move back into the region as the forward-looking outlook has improved. India is the fastest growing country, and China experienced a third quarter rally as the PBOC announced a stimulus package. However, if additional action is not taken by the government, the rally may not be sustainable. Still, emerging markets are projected to have faster earnings growth than the US in 2024 and 2025.

Bond yields seemed to have peaked in the first quarter and future returns look relatively attractive as the Fed continues its rate-cutting campaign. Looking forward, longer duration bonds are well positioned for attractive returns as the yields curve further normalizes, and short-term bonds may underperform their longer-term counterparts. Credit spreads are very tight, but defaults remain low, and yields are attractive compared to historical levels. Barring an increase in defaults, credit sectors look attractive.

This information is for educational purposes and is the opinion of Aldrich Wealth LP (“Aldrich Wealth”). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged, unavailable for direct investment, and do not include any transaction, management or other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Past performance does not guarantee future results and all investments involve risk. Aldrich Wealth is an investment adviser registered with the US Securities and Exchange Commission.