Market Commentary: September 2024

GeoWealth's Market Observations

INSIGHTS FROM OUR INVESTMENT SOLUTIONS TEAM

September's Key Themes:

• Equity markets finished the quarter strong as the S&P 500 returned 5.9% and set its 43rd all-time high for the year. The Nasdaq Composite and Dow Jones Industrial Average also posted solid returns for the quarter, as they returned 2.8% and 8.7%, respectively.
• The Federal Open Market Committee (FOMC) cut rates for the first time since the rate hiking campaign began in March of 2022. The benchmark lending rate was reduced by 50 basis points to a range of 4.75 – 5.00.
• Investors welcomed the FOMC’s larger-than-anticipated cut, and risk-on sentiment took hold in the final weeks of September. However, the upcoming U.S. election in November looks to add uncertainty and volatility to the markets as traders weigh the outcomes of differing policy positions.
  
  

US Equity

The US Equity market has shown resilience in the third quarter despite bouts of volatility triggered by concerns over the Federal Reserve's monetary policy and broader economic slowdown. Investors embraced the rotation trade to smaller-cap and value-oriented equities to start the quarter as the preference to own securities that may receive a tailwind from a rate-cutting cycle took hold.

Market participants are recalibrating expectations following the Fed's September rate cut, marking the first easing in four years. The reduction of rates signals that inflationary pressures are moderating, and with this cut, there is hope that the Fed will guide the economy towards a soft landing. The reaction from investors was positive, as risk-on sentiment took hold for the remainder of the month. 

The trend of equity returns broadening out beyond the Magnificent Seven that took hold in the second quarter persisted for most of the third quarter, as Utilities, Real Estate, and Industrials led the way. The only sector to post a negative return for the quarter was Energy. Crude oil prices trended downwards for most of the quarter before slightly rebounding at month's end. Recent projections from the International Energy Agency (IEA) are forecasting a slowing growth in demand as China’s rapid slowdown impacts demand growth. 

International Equity

The third quarter was marked by diverging performances across international markets. Europe, in particular, displayed pockets of strength, led by countries like France and Italy. Germany's industrial sector struggled due to its reliance on China and lagging adaptation to electric vehicle production. The European Central Bank (ECB) also cut interest rates in tandem with the Fed to stimulate growth. Inflation is trending downward, which should provide some tailwinds for regional consumer spending and corporate earnings.

However, risks remain. The Chinese economy, which many international markets rely on for growth, faces structural challenges. Despite ongoing stimulus measures, its property market woes and weak consumer confidence have yet to be resolved, limiting the potential for a robust rebound. On the other hand, Japan presents a mixed picture, with higher inflation and household spending under pressure, though corporate sentiment remains relatively positive.

International Equities present a mixed outlook as European stocks continue to be attractively valued, particularly in countries likely to benefit from recovering consumer confidence and declining inflation. However, uncertainty around China and the potential for further geopolitical disruptions remain significant risks.

Fixed Income

The fixed income landscape experienced positive developments in the third quarter, with the Fed’s rate cut leading to a decline in yields across the curve. Inflationary pressures are easing, particularly in the US, and global growth forecasts continue to moderate, driving demand for bonds. The performance of US Treasuries has been particularly strong, with the 10-year yield falling as markets price in further rate cuts. Emerging market debt also gained momentum, supported by lower inflation in those regions and a favorable rate differential against US Treasuries. Fixed income remains an attractive asset class, especially for investors looking to hedge against equity market volatility. 

Election Influence and Portfolio Strategy

As the US heads into the presidential election cycle, it is essential to reiterate that long-term investors should remain focused on their strategic outlook rather than reacting to short-term political events. Historically, the impacts of presidential elections on markets have been limited. US stocks have trended higher no matter which party holds office. A balanced 60/40 portfolio has typically delivered positive returns in election years, which is on track to happen again in 2024.

US markets have shown resilience through various administrations, with little correlation between political outcomes and long-term stock performance. We believe that the best approach for investors is to remain diversified and focus on asset classes and sectors that align with their long-term goals rather than making reactionary moves based on election results.

Looking Ahead

Q4 2024 presents both opportunities and challenges across global markets. With the Fed and other central banks entering a rate-cutting cycle, we anticipate supportive conditions for equities and fixed income. However, volatility may persist due to geopolitical and political events.

• Market Cap Diversification: Diversifying across large-, mid-, and small-cap stocks is critical to managing risk and opportunity. While mega-cap tech companies have driven much of the recent market performance over the last few years, their concentration carries unique risks. In the third quarter, a rotation trade saw equity returns broaden into areas like small- and mid-cap stocks as well as value sectors, reinforcing the importance of maintaining diversification across market caps and investment styles to capture opportunities in shifting markets.
• Global Diversification’s Role: Diversifying across global markets provides exposure to regions at different points in the economic cycle, reducing concentration risk. While the US leads in growth, opportunities in Europe and Asia offer the potential for gains and greater balance, especially as monetary policy and economic conditions vary internationally.
• Fixed Income in Balanced Portfolios: Fixed income may play a vital role in generating income and providing stability, especially in uncertain markets. With central banks beginning to cut rates, bonds are likely to benefit from falling yields, and their lower correlation to equities may help to mitigate overall portfolio risk. 

FOOTNOTES:

1. Data from Morningstar. Returns over one year are annualized.  

DISCLOSURES:

Past performance is no guarantee of future returns.

The graphs and charts in this commentary are for illustrative purposes only and not indicative of any actual investment. Index returns do not reflect any fees, expenses, or sales charges. Stocks are not guaranteed and have been more volatile than other asset classes. Historical returns were the result of certain market factors and events which may not be repeated in the future. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgement in determining whether investments are appropriate for clients.

The information here is not intended to constitute an investment recommendation or advice.

Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. The hypothetical performance calculations are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown. The hypothetical performance calculations for the respective strategies are shown gross of fees. If fees were included returns would be lower. Hypothetical performance returns reflect the reinvestment of all dividends. The hypothetical performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Past performance is not indicative of future returns. An individual cannot invest directly in an index.

This material has been prepared for information and educational purposes and should not be construed as a solicitation for the purchase or sell of any investment. The content is developed from sources believed to be reliable. This information is not intended to be investment, legal or tax advice. Investing involves risk, including the loss of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values.