2024 | 3rd Quarter
2024 Third Quarter Market Commentary
As investors, it is imperative to stay focused on the long-term and not overact to volatility and short-term market moves. As advisors, it is our job to make sure our clients do the same. In that role, we are armed with a number of charts, data, and anecdotes to remind our clients to focus on time in the markets, not timing the markets. One of our favorites is how the worst days in the market are typically followed by the best days. The third quarter saw several examples of this. The S&P posted its largest drop since September of 2022 on August 5th, only to see its best day since November of 2022 three days later. The start of September was similarly rocky, down 4.25% the first week, followed by a 4% rally the next.
In the end, despite bouts of volatility driven by fears of a rapidly cooling labor market and weak manufacturing data, equity markets saw their 5th-straight monthly gain in September, with the S&P 500 up 5.9% for the third quarter, and recording its 43rd record high this year to finish up 22.1% year-to-date.
While market recoveries are typically the norm, the third quarter also brought some less common occurrences. September’s 2.1% return for the S&P 500 was the first positive September since 2019. And the Technology sector saw its worst relative performance vs. the S&P 500 since Q2 of 2016, while the Utilities sector saw its best relative performance vs. the index since Q4 of 2018.
In last quarter’s commentary, we mentioned analysts’ expectations for a broadening of earnings growth, from the Mega Cap Growth names to the rest of the market. Third quarter performance reflected these expectations, reversing many of the trends we saw in the second quarter. Technology names underperformed, as Q2 earnings results, while outperforming analyst expectations, fell short of the high bar set by investors. Additionally, concerns about the high capital expenditures on artificial intelligence (AI) by companies like Microsoft, Amazon, and Alphabet hit the Technology and Communication Services sectors. The Utilities sector led the market, as the massive amount of energy needed to power AI came into focus. Utilities and Real Estate also benefitted from lower interest rates, as the high-yielding sectors come into favor as rates fall. In other reversals from Q2, Mid (up 6.9%) and Small Cap (up 10.1%) Equities outperformed Large Cap (up 5.9%), and Value (up 9.3%) outperformed Growth (up 3.2%). Year-to-date, Large Cap is still outperforming Mid and Small (22.1% vs. 13.5% and 9.3%, respectively), and Growth (up 24.6%) continues to outperform Value (up 16.1%).
Looking abroad, a weaker dollar aided International Developed Equities, up 7.3% for the quarter and 13.5% for the year. In Emerging Markets (EM), a stimulus package from the Bank of China led Chinese stocks to a 17% gain to end September. This was enough for EM to outperform US and International Developed for the month (up 6.7%) and quarter (up 8.9%). While up 17.2% year-to-date, EM continues to underperform U.S. Equities.
The third quarter marked the first interest rate cut by the Federal Reserve to the fed funds rate since 2020. Fed Chairman Powell expressed confidence that inflation is moving towards the Fed’s 2% target, but job gains have slowed, bringing the Fed’s dual mandate (price stability and full employment) into balance. Powell reiterated that the economy is in a solid place. Going forward, the Fed expects additional 1/4 % cuts at its two remaining meetings this year, bringing the fed funds rate to a range of 4.25% - 4.50%.
The ten-year Treasury yield fell throughout the quarter (from 4.36% to 3.81%), as investors increasingly expected the aforementioned rate cut by the Fed. The Bloomberg Aggregate Bond Index returned 5.2% for the quarter, turning positive for the year (up 4.45%). Corporate bond defaults remain low, profits are healthy, and balance sheets are in solid shape. This translated into strong performance for Investment Grade (up 5.4% for the quarter, 5.32% for the year) and High Yield (up 5.3% for the quarter, 8% for the year) bonds.
Looking ahead to the fourth quarter, geopolitical tensions in the Middle East, union strikes, and the presidential election all have the potential to impact the markets. While the election is a hot button topic, it is important to remember that what candidates propose and what they enact are two different things. Currently, a dividend government seems to be the most likely scenario. While continued political gridlock is not the ideal scenario to address our country’s key issues, it removes some of the uncertainty that markets dislike.
Markets will also be focused on corporate earnings and forward guidance. Currently, the S&P 500 is trading at over 21x forward earnings. Analysts expect year-over-year earnings growth of 10% this year and 15.2% next year. Economic growth remains solid at 3%, inflation is trending towards 2%, and unemployment is still at a very low 4.2%. That said, strong year-to-date performance, elevated valuations, and expectations for double-digit earnings growth all set a high bar for equities. Focusing on the long term, remaining diversified, and investing in high-quality companies can all help navigate any potential choppiness that lies ahead.
As always, feel free to contact us with questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Daniel A. Morris, M.S.
Co-Chief Investment Officer
Joseph K. Champness
Director
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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