2024 Q3 Market Overview
By: AJ Loughry
The long-awaited Fed easing cycle officially kicked off with a 50 basis point cut to the Federal Funds rate in September. Despite the aggressive tightening in monetary policy over the past 2 years, markets have broadly performed well with the S&P 500 trading at all-time highs and credit spreads trading at historically tight levels. The prospects of further easing as the economy remains resilient has further bolstered the case for a Soft-Landing economic scenario.
The Fed found comfort in cutting rates due to the persistently declining level of inflation experienced in recent years. After peaking at 9.1% in mid-2022, the year-over-year change in the Consumer Price Index fell to just under 3% by the end of the 3rd quarter. The unsnarling of supply chains and the waning impact of fiscal stimulus has driven disinflation, yet services & shelter costs remain elevated.
However, labor markets have become balanced – highlighted by easing wage growth pressures and a normalizing job opening to unemployment ratio. The unemployment rate has gradually moved higher during this period from a low of 3.4% to 4.2%, stoking fears of more pronounced weakness in labor markets that could lead to a broader growth slowdown. But by piercing through the data, it becomes clear that the rise in the unemployment rate has been driven by new entrants to the labor market (largely via immigration) as actual layoffs remain well below the pre-COVID decade’s averages.
In addition, broad measures of growth like the GDP remain above trend. Second quarter GDP growth in 2024 was 3.0% annualized, and real-time measures of Q3 GDP growth (measured by the Atlanta Fed GDPNow) is estimated to be 2.5% at the time of this writing.
Despite periods of growth fears to start the second half of 2024, markets continue to generate compelling returns with the S&P 500 advancing over 22% YTD. While the Magnificent 7 continue to be market leaders on a year-to-date basis, the third quarter saw the market laggards play catch-up. The S&P 500 Equal Weight, international equities, and small caps outperformed the S&P as the macroeconomic backdrop grew more favorable for these parts of the market.
Fixed income investments have also posted positive returns on the year as the market priced in expectations for significant rate cuts to end 2024 and into 2025. As the Fed’s rate cut decision neared, the US Treasury Yield curve un-inverted as the 2-year yield reflected the expectation for easing policy. However, despite the Fed’s decision to cut 50 basis points, longer dated yields have moved modestly higher as the Fed will likely have to deliver cuts above what the market is already expecting to drive yields significantly lower.
While economic growth remains above trend and the Fed seems to be intent on easing policy further, pockets of risk remain prevalent. Early into Q4, economic data has been surprising to the upside, potentially limiting the amount of easing the Fed can accomplish without reaccelerating inflation. Conflict has been escalating in the Middle East, and the US Presidential election remains a wildcard, all in the context of domestic equities trading at premium valuations to long-term averages. We continue to monitor for signs of further labor market weakness or reaccelerating inflation as primary risks to this market rally.
Market Overview
The prospects of a Soft Landing remain prevalent as the Fed began the rate cutting cycle. The S&P continues to lead equity markets, but international markets have closed the gap as market breadth widens.
Fixed Income saw positive performance as well as the market has priced in significant rate cuts & easing monetary policy.
Source: Bloomberg Barclays, MSCI; FY2023 as of 12/31/2023. For Equities & Fixed Income, YTD 2024 as of 9/30/2024. For Alternatives, YTD 2024 as of 8/31/2024.
U.S. Equity Style & Market Capitalization Returns
While Large Cap Growth remains the market leader the past two years, Value has started to participate as expectations for rate cuts were priced into the market.
Small and Midcap companies remain a laggard as the market has favored higher-quality companies.
Source: FTSE Russell
Fed Dot Plot Update
The Fed executed on the first rate cut of the cycle in September, cutting the Federal Funds rate by 50 basis points. As shown in the below Dot Plot charts, the Fed has sped up their expectation for interest rate cuts over the remainder of 2024 and 2025.
Source: Board of Governors of the Federal Reserve System
Inflation Moderates
The Fed’s willingness to ease policy has been driven by continued easing inflationary pressure. The year-over-year CPI has moved below 3%, but remains elevated due to services & shelter.
Consumer Price Inflation Year-Over-Year
Source: JPMorgan. As of 9/30/2024
Unemployment Rises & Wage Growth Eases
Normalizing labor markets have further validated easing monetary policy as the unemployment rate moves higher and wage growth eases.
US Unemployment & Wage Growth Rate
Source: Bloomberg. As of 9/30/2024
While Actual Layoffs Remain Subdued
However, the increase in unemployment was driven by rising entrants to the labor market as opposed to actual layoffs.
US Layoffs & Discharges
Source: Bloomberg. As of 9/30/2024
Broad Growth Remains Robust
And the broad economy continues to be robust, with real-time forecasts of Q3 GDP at 2.5% and consensus economist forecasts of just under 2% - indicating the economy continues to do well even as the Fed eases.
Source: Atlanta Federal Reserve. As of 10/2/2024
International, Equal Weight & Small Caps Play Catch-Up
Equities continue to perform well in this environment, with the market laggards playing catchup and outperforming the S&P in Q3. However, the S&P remains the market leader by a wide margin over the past few years.
Year-to-Date Equity Market Performance
Source: Bloomberg. As of 9/30/2024
Yield Curve Un-inverts
With the Fed signaling its intent to lower interest rates, the 2 and 10-year treasury yields un-inverted. The market aggressively priced in interest rate cuts ahead of the Fed’s announcement, but have seen yields drift higher since the actual cut
The Fed may need to surprise with more cuts than what’s currently expected to drive longer-dated rates lower.
2 & 10-Year Treasury Yields
Source: ustreasuryyieldcurve.com
Asset Class Analysis
Equities: Target-weight
Equity markets continue to perform well this year. Large cap growth stocks continue to lead the pack, but we are beginning to see Value and smaller-cap companies gaining some positive momentum, supported by a backdrop of lower rates and a still strong economy. More reasonable valuations have also drawn attention versus the Mega-caps. International equities are benefitting from a weakening dollar and strong cyclical tailwinds. However, we continue to prefer domestic equities and maintain a large-cap quality orientation overall, and complement these with high quality smaller cap active allocations based on expectations for broadening market strength.
Fixed Income: Target-weight
The Fed is now officially in an easing cycle, which will continue into the new year. While short-term interest rates will fall relatively quickly, the impact on longer-maturity bonds may be muted, barring a material slowdown in the economy. Thus, staying relatively shorter-duration and picking up incremental returns from credit and securitized assets above treasuries can enhance income from this asset class. We barbell this allocation with high-income producing private credit and liquid investment grade bonds.
Liquid Alternatives: Target-weight
Hedge Funds: Hedge funds continue to serve as the diversifying asset class to traditional stocks and bonds. We continue to increase exposures to uncorrelated and macro strategies while culling more directional allocations.
Real Estate: The asset class has fallen out of favor with rising rates and looming debt maturities, despite their long-term inflation-aligned characteristics. Given depressed values, we are seeking opportunistic investment strategies in both debt and equity that can offer enhanced return potential without taking material risk.
Illiquid Alternatives: Target-weight
2023 performance for illiquid assets was muted. While underlying portfolio company earnings have improved, dealmaking activity remained light. Rate cuts and lower borrowing costs should revive transaction activity and return capital to investors. Additionally, as valuations have softened, current vintages provide an attractive entry point to support long-term returns. Secondaries purchases (where investors buy fund investments at a discounted price to provide the seller liquidity) are providing de-risked access to earlier deals.
About AJ Loughry, CFA
Vice President
Mr. Loughry joined Simon Quick in the summer of 2018 following his graduation from St. Bonaventure University. As a Vice President on the Investments Research team, he is responsible for the monitoring of previous investments, as well as quantitative, qualitative, and operational due diligence on a variety of new investment opportunities. AJ frequently participates in meetings and calls with prospective and existing managers. Lastly, Mr. Loughry is a member of the Hiring Committee, where he helps to identify and interview new talent for the firm.
At St. Bonaventure University AJ received bachelor degrees in Finance and Accounting, graduating Summa Cum Laude. During his time at St. Bonaventure, AJ was a manager of SIMM, a student-run investment fund with a portfolio of over $300,000. Mr. Loughry was also involved with two service organizations on campus, Bona Responds and Bona Buddies. Lastly AJ played on his school’s club basketball team, and still enjoys playing in his free time today.
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