Equity markets continued to build on the year’s strong start during the third quarter. It was a turbulent period for U.S. markets, with the S&P 500 posting both its biggest one-day drop following a weak jobs report that fueled fears of a recession at the start of August, followed by the strongest rebound since 2022. By September 30, 2024, the S&P 500 Index posted its best year-to-date return of this century, rising 22.1%. The most remarkable development to observe through the last months was the broadening of the market. While the market rally of the last year and a half was disproportionally led by a small group of technology-related mega-capitalization stocks, the last quarter saw a rotation in market leadership. The average stock, as measured by the equal-weight version of S&P 500, almost doubled the return of its market-weighted one for the quarter. Mid-cap and small-cap indexes also beat the S&P 500 during the quarter after trailing it for the prior eighteen months. Furthermore, value stocks outperformed growth by nearly 4%.
All sectors of our domestic economy but one were positive for the quarter. Utilities led the way, benefiting from both lower interest rates and anticipated incremental demand from power-consuming AI software. Real estate and financials also rallied on lower rates. Industrials were strong, as cyclical stocks were up in anticipation of an improving economic outlook. Energy, the only down sector for the quarter, was particularly weak on lower oil prices. Information technology and communication services were held back by mixed performance among the Magnificent 7, but still managed positive returns.
International equities slightly outperformed their U.S. counterparts in the third quarter. International developed market stocks, as represented by the MSCI EAFE Index, outpaced S&P 500 by 1.4%. Emerging markets also performed well, finishing the third quarter to be the second-best performing equity asset class year-to-date, behind U.S. large cap stocks.
The last quarter highlighted a significant shift in interest rate expectations, as we observed a substantial decline in interest rates across various maturities. The yield on 10-year U.S. Treasuries fell from 4.48% on the first day of the quarter to 3.8% on September 30, 2024. As a result, the U.S. Aggregate Bond Index rose 5.2% through the last three months, securing its longest monthly positive run in three years. Notably, the 10-year yield rose above the 2-year, ending the long-standing yield curve inversion.
Final second-quarter Gross Domestic Product estimates indicated that annualized quarter-over-quarter growth rose from 1.6% in the first quarter to 3.0% in the second quarter. Compared to the first quarter, the acceleration in GDP was primarily driven by increased government and consumer spending.
Inflation continued to fall significantly since it reached its four-decade high of 9.1% in June 2022. The August inflation report, released in September, showed headline inflation at a 41-month low of 2.6% on a year-over-year basis. The labor market remained resilient, though the unemployment increased from 3.7% in the beginning of the year to 4.2% in August. These developments prompted the Fed to take decisive action, initiating a rate-cutting cycle with a largely anticipated 50 basis point reduction, which doubled the usual increment. This was the most important message from the Fed during this meeting, signaling a clear shift in focus from controlling inflation to safeguarding the labor market and supporting economic expansion.
The forthcoming presidential election is another element drawing investors’ interest. Although it seems that we have been in this election cycle for the last four years, it is finally come to a homestretch. History tells us that market volatility increases during weeks before and after election, and this time should not be different. While some of us feel strongly about the way political events turn out, it is important to remember that the president is only one of many elements affecting the markets over time, and, regardless of which party is in charge, stocks have historically gone up. Stocks did not produce a single 15-year rolling period with a negative return since 1926, and although the short-lived turmoil around election can be distracting, it is it important to keep our eyes on long-term objectives and remember that good investing is about following your strategy throughout all kinds of market conditions.
Dumont & Blake Investment Advisors, LLC
September 30, 2024