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Key Takeaways, Third Quarter 2024

By Ralph Goldsticker, CFA | Oct 2024

Positive but volatile markets, capped by a largely anticipated rate cut, suggest that the US economy remains on track towards achieving a soft-landing. Both stocks and bonds had solid gains. The S&P 500 and MSCI World found new highs. Tech’s recent strong performance weakened, replaced with an improvement in Utilities and Real Estate.

Marking a shift in monetary policy, the Fed and other central bankers cut rates and signaled more are on the way. Amidst both lowering inflation and moderate growth, the cuts signal a developing focus on preserving growth and employment as well as progress towards the Fed’s 2% target. Both Fed comments and the dot plot suggest there will be another 50 bps of cuts by year-end, and another 100 bps in 2025. Geopolitical tensions and uncertainty however continue to impact the outlook.

Equities

Global equity markets continued their upward run. US, developed international, and emerging market equities all moved higher as central banks around the world cut interest rates.

Despite a bout of volatility in August, the broad US market gained 6% and small caps gained 9%. Developed international stocks gained 7%, and emerging market stocks 9%.
For the last 12 months, the broad US stock market is up 35%. Lacking the Magnificent 7, small caps were up only 27%. The US stock market is up 86% since year-end 2019 (pre-pandemic), 14% annualized.
Reversing the first half of the year, Value stocks outperformed Growth (9% vs 3%). Growth outperformed for all longer trailing periods - by 14% for the last 12 months (42% vs 28%), by 9% per annum for the last 5 years (20% vs 11%), and by 8% per annum for the last 10 (16% vs 9%). Since the start of the pandemic (year-end 2019), Growth outperformed Value by 8% per annum.
International stocks lagged the US a bit due to weaker economic news overseas. Developed markets were up 7%, and 25% over the last 12 months. Emerging markets were up 9%, and 26% for 12 months.

Fixed Income

Bonds rose across the board as central banks loosened monetary policy, cutting rates for the first time in four years. The yield of the 10-year Treasury fell by 62 basis points. Spreads widened a bit.

The target Fed Funds range was lowered by 50 basis points to 4.75% to 5.00%
The yield of 3-month T-bills finished the quarter at 4.73%, down 75 bps for the quarter, and down 67 bps YTD.
10-Year Treasuries finished Q3 yielding 3.78%. The yield was down 62 bps for the quarter, 10 bps YTD, and 79 bps over the last year.
Investment Grade (IG) corporate bond spreads narrowed by 4 bps to 84 bps and High Yield’s by 14 bps to 2.95%. IG spreads are 6 bps narrower than at year-end 2019, and High Yield’s are 41 bps narrower.
The break-even inflation of 5-year TIPS fell 19 bps to 2.09%, and the break-even on 10-year TIPS fell 10 bps to 2.19%. Both suggest that investors believe it is unlikely that inflation will spike.