The stock market has had a great run over the first three quarters of 2024 and is up 22%.1 The markets received a “treat” when the Fed finally lowered interest rates at the end of September, easing some of the headwinds businesses may be facing. The economy appears headed for a “soft landing” rather than a recession but navigating the speed and extent of future interest rate cuts will be “tricky” for the Fed. Given the potential for profit-taking and the uncertainty surrounding the upcoming election, we think some short-term volatility is in order, but that shouldn’t stop the long-term trajectory of the market.
Broader leadership
Growth stocks have been driving the market for a while now but we finally saw a rotation out of large growth and into value and small and mid cap stocks in Q3. The graphic below shows how equity style boxes reversed from Q2 to Q3.2 Especially impressive was the utilities sector which returned a whopping 20% for Q3 and now leads all sectors (even technology) for the year-to-date!2
Interest rate cuts
With inflation on a strong downward trajectory and concerns about economic weakness rising, the Fed clearly decided now was the right time to cut. The size of the cut (0.50%) was a surprise to many, but it is certainly welcome news for many who thought that rates were held too high for too long, starting to weigh on the labor market. As you can see from the chart below, stocks tend to perform well in the 12 months following the first rate cut.3 In some cases, rates were cut because the economy was already in a downward spiral. This does not appear to be one of those times as most economic indicators show a healthy economy.
S&P Performance After Rate Cuts
S&P 500 Return 12 months after first rate cut (8/9/1929 – 7/31/2020)
What’s the takeaway?
- Diversification plays a key role in any portfolio. The market as a whole keeps chugging along even if some industries peak at different times.
- It has paid to have discipline in the face of recession fears and hold equities while other investors ran to the sidelines.
- Strategic rebalancing may be in order after the sharp run up this year because the market will eventually cool off—it’s just a matter of when and by how much.
Sources & Disclosures
1. Data taken from Kwanti.com based on the S&P 500 Total Return Index
2. https://www.morningstar.com/markets/13-charts-stocks-bonds-q3-roller-coaster-rallies
3. https://www.schwab.com/learn/story/what-past-fed-rate-cycles-can-tell-us
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