Q3 2024 market update

Q’3 2024 Market Update: Broadening out, Embarking on Easing & Heading to the Polls

How the summer of 2024 was anything but sleepy.

After back-to-back years where selling in May and going away was sound seasonal advice, the June through September period this year was a welcome contrast with the S&P 500 ending up over 5% for the quarter. The confirmation that inflation was back on its slowing path and approaching the Central Bank’s 2% target as evidenced by the June CPI report set off a rally in both stocks and bonds alike. Rather than see the continued leadership of the Mag 7 as has been the case since Q’1 2023, small caps, cyclicals and value stocks domestically carried the mantle while overseas shares also registered impressive gains outperforming the most widely tracked US large cap index. Is the much talked about catch up trade underway, it seems that may be the case, though surely there will be some fits and starts along the way. 

The easing of inflation worries has allowed the Fed to shift its focus on a cooling labor market which lately has been referred to as a “low fi, low hi” environment. Powell did his best to set the table for the first rate cut in what will likely be a multi-year easing process back in Jackson Hole in late August. While there had been some chatter about starting off more ambitiously, odds of the rate cut of 25 or 50 basis points were even money leading up to the meeting. The decision to opt for the larger move seemed to signal that the talk of the death of the Fed Put may have been greatly exaggerated to paraphrase Mark Twain, and with that, the market was off to the races erasing any early month declines or the corresponding worries of growth scares that marked the beginning of both August and September.  The future policy path will reverse much of the work the Central Bank had enacted over the last two years where eleven hikes left the Fed funds rate between 5.25-5.50%. This marked the end of one of the more aggressive tightening cycles in the last 25 years. Perhaps lost in all the Fed focus, second quarter earnings came in above expectations at nearly 10% while 2024 estimates as a whole moved a touch higher to 11%. The combination of improving earnings and easier money serve as a nice combination for equity markets, though current valuations seem to reflect those tailwinds to some extent.

Leaving the US for a moment, easing conditions have also appeared in much of the world,  with the exception being Japan, central banks have started cutting rates and perhaps have more room (and reason) to get rates down from the current elevated levels.  With risk assets rallying throughout much of the world, the combination of lower valuations and possibly even some fiscal stimulus in both Europe and China have sparked some optimism that may have been checked at the door earlier this year.  On the latter front, China introduced significant monetary policy accommodations resulting in a stock market rally of nearly 25%. Whether or not the gains will continue or will be given back likely depends more on the fiscal policy path versus simply the monetary programs which we have seen to have little efficacy on the real economy in the post GFC period.

We would be tone deaf if we did not mention Washington. With an important election (aren’t they all) less than 30 days away, investors seem to be taking in stride what could be a photo finish.  Perhaps resigned to some form of divided government resulting in limited significant policy change or the realization that the market cares far less about Washington than the rest of us do, the S&P has registered new all-time highs forty-two times over the first 9 months of the year. As James Carville famously stated, “It’s the economy stupid” and the next president is unlikely wanting to fritter away the Goldilocks backdrop if they want to achieve any policy objectives in the years ahead. There is still work to be done in the Beltway as a looming government shutdown in early 2025 remains a possibility, but we’ll save that for next time.

Disclosure: The views expressed represent the opinions of Breakwater Capital Group as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.

Additional information, including management fees and expenses, is provided on our Form ADV Part 2, available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results. 

Sources: Factset, Barron’s, WSJ, Economist

Breakwater Team

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