Market Wise Update: Third Quarter 2024
Transcript:
Zach: “Hello, and welcome to the Market Wise Update for Q3 2024! I’m Zach Ivey, Financial Advisor and Investment Strategist.”
Chip: “And I’m Chip Kalousek, Senior Investment Strategist. Today, we’re going to break down what happened in the third quarter of 2024 and highlight key takeaways for investors.”
Zach: “Let’s kick things off with a look at the U.S. stock market. After a brief dip in early August, U.S. stocks closed out the third quarter with impressive gains. Chip, what are we seeing in the U.S. stock market right now?”
Chip: “Zach, this quarter was all about the shift in market leadership. Earlier in the year, mega-cap AI stocks were the stars, but in Q3, they took a back seat. Interest rate-sensitive areas like small cap and value stocks took center stage. If you look at the period returns, we’re seeing U.S. stocks up 26-38% over the past year, depending on the segment.”
Zach: “That’s a great point. The market has continued to favor disciplined investors over those chasing trends. What’s interesting is that small and value stocks, which have lagged slightly behind their larger counterparts, now present an opportunity for investors.”
Chip: “Exactly. With value and small-cap stocks showing strength, this could be the time for those areas to catch up, offering higher expected returns going forward.”
Zach: “Now, let’s shift our focus outside of the U.S. Stocks outside the U.S. had a strong quarter as well. In fact, they outperformed U.S. stocks. Chip, what’s driving those gains?”
Chip: “We saw impressive gains from international markets, with international small and value stocks leading the way. Interest rate-sensitive REITs also surged. And while international stocks have lagged over the long term, this quarter showed that diversification is key. It’s not just about U.S. stocks.”
Zach: “That’s right, and as we often say, market returns come from places we least expect, reinforcing the importance of staying diversified across sectors and geographies.”
Chip: “Let’s move on to bonds. Bonds had a bright spot this quarter as well, with yields falling in anticipation of the Fed’s first rate cut in four years. Multi-sector bonds, in particular, outperformed, and we’re starting to see the yield curve normalize.”
Zach: “Looking at the period performance, bonds haven’t fully recovered from 2022, but over the past year, they’ve delivered high single to double-digit returns. And Chip, I think it’s important to highlight how bonds acted as a buffer in August when stocks briefly sold off.”
Chip: “Absolutely. Bonds did exactly what they’re meant to do—provide a portfolio buffer during periods of volatility. We even saw their negative correlation come back, which is reassuring for balanced portfolios.”
Zach: “Now, turning to alternatives. Chip, alternatives have been playing an increasingly important role in portfolios. What stood out this quarter?”
Chip: “Real assets outperformed as interest rates came down, but trend-following strategies lagged. I’m going to reframe this one negative as a positive. Proper diversification means not everything goes up at the same time. Think of trend-following strategies as portfolio insurance for prolonged downturns. The negative returns we saw are like the insurance premium we pay for protection when we need it most.”
Zach: “Let’s wrap up with a quick look at the broader economy and monetary policy. The U.S. economy remains strong, growing at a solid 3% in the second quarter, largely driven by consumer spending. Chip, what are the key drivers behind this growth?”
Chip: “The labor market continues to be a pillar of support. We’re averaging 185,000 jobs per month, which is in line with pre-pandemic levels. And while unemployment has ticked up to 4.1%, it’s due more to an increase in labor supply rather than people losing their jobs. Overall, the labor market looks healthy, which boosts consumer confidence and spending.”
Zach: “Inflation has also been a hot topic, and we’ve seen a continued disinflation trend. The Fed’s preferred measure, Core PCE, is now at 2.7%, its lowest level since March 2021. This means we are now 75% of the way to the Fed’s target to 2%. Chip, where do you think inflation is headed?”
Chip: “Well, the last mile to the Fed’s 2% target might take a bit longer, but the data points to continued disinflation. Shown in the table on the left is month-over-month changes in Core PCE, annualized. The colors show the trend in cooling inflation, with lower number highlighted in green yellow and higher number highlighted in red. Starting in Q3 2021 at the top of the chart, you can see the acceleration of inflation into 2022 and then at the bottom of the chart, the recent MoM changes inflation annualized trending around 2%.
This is encouraging as it’s allowed the Fed to shift its focus back to supporting economic growth. The headline this quarter was the Federal Reserve cutting the Fed Funds rate by half a percentage point. This is a significant development because the Fed Funds rate is the anchor for all borrowing costs across the economy. The upper range of the rate isnow at 5%, down from 5.5%.
Zach: “That’s right, Chip. As the Fed continues to cut rates, borrowing becomes cheaper, which supports both consumer spending and business investment. This move signals confidence in the economy’s resilience, even as inflation trends lower. For investors, lower rates mean it’s time to reassess opportunities, especially in fixed income and bond markets, which could offer attractive yields in the current environment.”
Zach (continued): “Now, let’s talk about the upcoming U.S. presidential elections, which are just around the corner. Historically, elections can create uncertainty for markets. Chip, what are we seeing in the market’s reaction to the upcoming election?”
Chip: “Well, Zach, historically, the S&P 500 has been positive during an election calendar year 89% of the time, with the exception being 2000 and 2008. In the calendar year following an election year, the S&P 500 is up on average 11.2%. The important thing for investors to remember is that elections are short-term events. The best strategy is to stay focused on long-term fundamentals and avoid making emotional investment decisions based on headlines.”
Zach: ” Exactly. One important takeaway as we head into election season—vote at the ballot box, not with your investment portfolio. It’s tempting to make changes based on the political landscape, but history has shown us that the market tends to reward long-term discipline over short-term reactions.”
Chip: “Absolutely, Zach. No matter who wins, the economy and markets will adjust. The key for investors is not to overreact but to stay focused on their long-term financial goals and investment strategies.”
Zach: “Exactly. Well, that covers the major events shaping the markets this quarter. We hope this Market Wise Update has given you a clear picture of where we are and where we might be heading as we approach the end of the year.”